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Funding arrangement changes could hurt pensioners

UK – A ‘pensions accident’ is waiting to occur in the UK, if more defined benefit (DB) schemes become underfunded, leading to an increased risk of pension funds being unable to pay their pensions in full, warns Deutsche Asset Management (DeAM).

The warning comes as DeAM publishes a report outlining its views on the reform of occupational pensions in the UK. The report was a response to the Myners review.

Says Steven Bell, author of the report and chief economist at DeAM: “over the past few years, the pension fund climate in the UK has changed considerably. Markets are weak yet there have been significant delays in the reform of occupational pensions. Planned changes to the funding arrangements for DB schemes mean that pensioners could lose out.”

Bell believes that the reforms need to be implemented quickly to prevent an ‘accident’ and to prevent the continued closure of many DB schemes.

Elsewhere, DeAM believes the recommendations in the Myners review could see an increase in UK pension funds’ use of hedge funds, since these have a weak correlation with traditional asset classes such as equities and bonds. But any changes are likely to be slow in coming, as many hedge funds are a new concept to trustees, who tend to react conservatively.

DeAM is sceptical about private equity, however, which many pension funds perceive as a form of leveraged equity investment.

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