(May 15, 2012) — Pension funds in the United Kingdom are chronically under-hedged against some of their largest risks, despite citing them as their major fears, research has found.
Some 53% of trustees responding to a survey by insurance specialist Pension Corporation have taken no steps to reduce longevity, inflation, and investment risk exposure.
The survey showed trustees were concerned about the impact of market volatility on funding positions, yet were extremely under-hedged against major risks
Pension Corporation said: “For a typical pension scheme, which isn’t hedged for inflation, a 1% rise in long-term inflation expectations could see liabilities increase by around 20%. At the same time, trustees with open schemes remain fearful that even these will be closed to future accrual because of the ever increasing burden placed on sponsors, yet in many cases are failing to remove some or all risks.”
At the end of April, the Pension Protection Fund, the lifeboat for bankrupt company schemes, said the aggregate deficit of the 6,432 schemes in the UK had risen to £216.8 billion from £206.2 billion a month earlier.
Almost half of all respondents to the Pension Corporation survey – 46% – expected their funding level to be lower than at their last valuation, and 22% thought their corporate sponsor was weaker this time around too. An additional 29% also expect to see lower investment returns going forward.
David Collinson, Co-Head of Business Origination at Pension Corporation, said: “The government talks of introducing a “Defined Ambition” pension system. The reality for many members of private sector defined benefit schemes is that this is exactly where they are today. What many in the pension system fail to realise – or worse are afraid to say – is that those members who hope to start drawing their pension in the next few years or decades will not necessarily be getting what they were promised today.”
One of the fixes trustees have cited to look at over the next couple of years is tapping the sponsor for additional contributions. Some 37% of trustees said they would ask their parent company for more money – of which 20% said they would be seeking an increase of over 10% from what is paid in today. However, this is a slightly better prospect than last year when 55% of trustees said they would ask for more than a 10% increase after the next valuation.
Pension Corporation said that going on the numbers stated this year, these additional contributions could reach £100 billion over the next three years – amounting to 13% of all cash held by on UK publically listed company balance sheets.
Collinson said: “Hard pressed sponsors may well despair that the huge amounts of money they have put into pension plans seems to be eaten up by continued asset and liability underperformance.”