Trustees and actuaries of pension schemes which have an investment strategy which is "too safe" could be open to claims of negligence.
Law firm Reynolds Porter Chamberlain (RPC) says although a number of claims have been launched against pension trustees and their advisers who took high risks on the equity markets before 2001-2002, it warns investment strategies which are more conservative than normal but which still leave a deficit could also attract negligence claims.
It says a poor performance by equities in 2001/2002 has led to an increase in the use of liability driven investment (LDIs) strategies where entire portfolios have been shifted into “safe” investments such as gilts or a mixture of gilts and corporate bonds, which are designed to match their long-term liabilities.
But Simon Goldring, a partner at RPC, says unless it is reviewed carefully this type of strategy could be storing up problems for the future as a low yielding gilts strategy could lock in a fund’s deficit, while a more balanced gilt and equity investment has a better long term chance of capital growth.
In addition he warns as many pension schemes have switched to gilts, this has pushed up the prices, meaning yields have fallen which weakens the market, while in comparison Goldring says the equities market has increased in value since March 2003.
And he warns changes to pensions legislation may also exacerbate the problem as under the Pensions Act 2004 trustees are required to have a full understanding of their scheme, including the funding and investment principles.
He adds: “While they are entitled to rely on the actuary’s advice they cannot do so blindly. And if equity markets continue to perform well and gilts do not improve, the environment becomes more fertile for negligence claims caused by an under-exposure to equity investments.”
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Reasons to be cheerful
Total investment reaches £9m
Medium to long-term capital growth