UK - Companies whose pension schemes remain heavily invested in equities should reconsider they are in a vulnerable position, argues Bob Scott, partner at Lane Clark & Peacock (LCP).
Presenting the LCP Accounting for Pensions 2007 survey, which shows UK pension schemes of FTSE100 companies had a net surplus of £12bn last month, Scott argued funds with large equity holdings are running a material investment risk.
According to figures presented by LCP, schemes have, on average, 57% of their assets invested in equities, the highest weighting being 81%.
Moreover, LCP estimates there is a one in 10 chance the position could fluctuate up or down by £50bn or more in a 12-month period.
"The fragility of the surplus was highlighted by recent stock market falls," said Scott, adding companies need to understand the risks involved and how vulnerable they are to the performance of equities.
"The surplus may not survive once companies reflect the latest mortality projections in their accounts," LCP added in its study.
Nonetheless, in comparison to last year, when the survey found a £36bn deficit, companies are making moves to manage down risk.
"The level of equity investment has fallen over the year, despite rises in the market over that time and some companies have disclosed major changes in their investment strategy," with HSBC, for example, significantly moving into bonds, and Diageo and Alliance & Leicester taking out swap contracts, according to the survey.
LCP also found the opportunities to reduce risk, such as offered by the buy-out market, are opening up and more pension funds might be taking risk reduction measures via this route.
"We expect trustees and companies will be examining these new products more closely over the next few months although, for the time being, the evidence shows that in terms of managing risk, the focus has been on investment strategy and not yet on buy-out solution," said LCP.