Pension funds need to place more emphasis than ever on risk management as they battle record deficits and low returns, BlackRock has warned.
Andy Tunningley, head of UK strategic clients at the asset manager, said “the cost of making the wrong decision gets ever greater” for pension funds as they mature.
His comments came as the Pension Protection Fund (PPF) reported the total deficit across schemes in its 7800 index was £224bn (€257bn) at the end of 2016 compared with £195bn 12 months earlier – although the calculation method for the index changed last month.
“For UK pension schemes, 2016 was like a marathon on a treadmill,” Tunningley said. “Energy was spent, [and] pain incurred, but the finish line looked upsettingly similar to the starting post…. One step forward, one step backward was the story of pension fund deficits in 2016.”
Tunningley warned of further difficulties ahead given an uncertain outlook for the UK economy and the potential for “declining corporate health of sponsors”.
Different sources have given wildly different estimates for the funding position of UK pension schemes – but all paint a similarly dismal picture.
Mercer’s research, which covers FTSE 350 companies’ pension schemes, said the aggregate funding position declined from 91% to 84%, with a total deficit of £137bn.
Data from JLT Employee Benefits, which monitors all private sector DB schemes, showed the aggregate funding ratio fell from 84% at the end of 2015 to 77% at the end of 2016, as the net shortfall hit £434bn.
PwC estimated the UK’s total shortfall at £560bn, adding that companies would have to pump £10bn a year into schemes to erase this figure within a decade.
Pension schemes using liability-driven investment (LDI) strategies were among the only winners last year, according to Tunningley.
“Many schemes should be hedging more, and [we] expect continued pension de-risking activity to drive appetite for UK LDI strategies in 2017,” he added.
He also highlighted “liability-sympathetic secure income assets” to help manage funding-level volatility and rein in deficits.
“Though no silver bullets exist to eradicate the pensions problem, many pension funds can make more of these assets to improve their outcomes,” Tunningley said.