A third of company pension schemes ensure contributions do not rise unsustainably by placing an emphasis on higher equity outperformance in their recovery plan than in their technical provisions.
According to a survey by Hewitt Associates, a total of 40% of schemes still have 70% or more of their assets in return seeking assets such as equities.
John Belgrove, senior investment consultant at Hewitt Associates, says: “Much has been written about pension schemes selling equities and buying bonds. This has been driven by a heightened need for some schemes to manage more effectively shorter term risks relative to liabilities. However, what this research shows is that many trustees are still reliant on future equity returns as an integral element of their schemes’ recovery plans.”
Hewitt Associates surveyed 52 company schemes with assets of more than £1bn and also found that almost 90% aim for a deficit repair period of less than 10 years. More than 80% of pension schemes aim for 100% of PPF or FRS17 funding.
Pension schemes look beyond conventional cash contributions to manage overall funding risk with 40% of schemes already having some form of contingent asset in place. Another 20% said they are actively considering implementing such a structure.
A parent company guarantee is the most popular approach, allowing the trustees to ignore the complexity of the corporate structure and focus on the ultimate owning company.
Two-thirds of schemes have partially de-risked liabilities by traditional routes such as closing to new entrants, moving accrual to a career average scheme or even closing to future accrual. A handful of schemes are looking at, or implementing more innovative solutions to de-risk the liabilities such as sharing the longevity risk with the members.
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