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IPE special report May 2018

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Pension funds see rising life expectancy as biggest funding risk

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  • Pension funds see rising life expectancy as biggest funding risk

EUROPE - Pension schemes in the UK see rising life expectancy as the greatest risk to funding levels, and ranked the factor above falling equity markets and rising inflation, according to a study by fiduciary manager SEI.

Respondents placed the latter two factors second and third as perceived risks.

Ashish Kapur, head of solutions for SEI's institutional group in the EMEA region, said longevity risk had received a lot of attention over the last two years.

"This is not surprising given the regular reports in the press about increasing life spans and the fact it is difficult for actuaries to make accurate predictions about average mortality," he said.

This increase in attention, coupled with the fact market volatility has gone down to pre credit-crisis levels, could account for a renewed focus on longer-term risks like longevity, Kapur said.

SEI's research took in responses from trustees, finance directors and other pension fund executives from 51 UK pension funds.

With the market for longevity insurance still new, and a variety of other risks facing schemes, Kapur said trustees needed to make careful decisions about how to manage risk.

"Before trustees decide to hedge these risks, it is important they assess and quantify each risk facing the scheme and have a long-term plan in place to manage these risks," he said.

The poll also showed that many pension funds have been unable to lock in equities' outperformance seen at the beginning of this year because of lack of awareness or slow decision-making.

The UK FTSE rose 9% in sterling terms over the three months to 31 March this year, SEI said.

It added: "This provided a potential opportunity for UK pension schemes to lock-in funding level outperformance by switching a portion of their portfolio's growth-oriented assets into liability-matching assets."

But the study showed that, while some schemes actively decided not to lock-in outperformance for a variety of reasons, 30% of them could not take advantage of this strategy, either because they were not aware of the impact on their funding level at the time or could not take action quickly enough.

Kapur said this revealed potential flaws in the governance model of many schemes, especially those with a quarterly meeting cycle. 

"With current meeting schedules, it is difficult for pension schemes to act quickly enough to capitalise on opportunities, or protect against the downside," he said.

In the last 12 months, two-thirds of the study's respondents said they had made some sort of change to their governance structure to speed up decision-making.

The most popular change was setting up de-risking or re-risking triggers, followed by having trustee meetings more often.

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