UK pension trustees are focusing too much on funding shortfalls at the expense of being able to pay pensions sustainably, according to a survey.
Consultancy firm Hymans Robertson said only 9% of the 100 trustees it surveyed for its “Trustee Barometer” report acknowledged the importance of their scheme’s cash-flow position.
Calum Cooper, partner and head of trustee DB at Hymans Robertson, said: “Given the purpose of a pension scheme is to pay pensions, it is surprising that this is not the key strategic driver for 99% of trustees. This highlights that when it comes to strategy, the industry still relies on volatile balance sheet deficits and discount rates.”
Estimates of the UK’s aggregate defined benefit (DB) pension deficit vary significantly. JLT Employee Benefits’ assessment across all DB schemes reported a shortfall of £434bn at the end of 2016, while PricewaterhouseCoopers put the figure at £470bn (€549bn). The Pension Protection Fund’s 7800 index of scheme funding gave an aggregate deficit of £224bn, and Mercer data on FTSE350 company pension schemes showed a gap of £137bn.
Hymans Robertson’s estimate exceeded all of these, at £790bn.
However, Cooper argued that focusing too much on funding the deficit “clouds the issue of how best to secure members’ pensions”.
“Discussions about technical matters like discount rates and inflation risk premiums perpetuate the deficit problem as it focuses time and effort in the wrong places, drowning out efforts to embed a fully integrated approach to strategy and risk,” Cooper said.
The Financial Conduct Authority’s ongoing review of the asset management industry raised questions about whether trustees are able to challenge their advisers. Cooper said this suggested “dearth of inclusive, big picture advice and leadership” in pension funds, resulting in trustees “unwittingly putting members at risk”.
Hymans Robertson’s survey showed that 21% of trustees reported having no specified timeframe for meeting goals, down from a third (33%) last year.
Less than 10% “recognised cash-flow negativity was an issue affecting their scheme”, Cooper said. This is despite the consultancy’s estimate that more than half of FTSE350 schemes are or soon will be “materially cash-flow negative” as they begin to pay out more than they bring in.
“Cash-flow risk is an issue that still isn’t getting the recognition it deserves,” Cooper said. “That’s despite the Pensions Regulator highlighting that cash-flow planning is vital to effective scheme management.”
Henderson Global Investors cited the growing number of DB schemes turning cash-flow negative when it announced the launch of a new cash-flow driven investment strategy yesterday.