Bulk of UK Pension Schemes Structurally Underhedged

The research conducted in the United Kingdom has revealed that the bulk of pension schemes in the UK are structurally underhedged, with 85% of pension schemes having less than 50% inflation-linked assets matching their liabilities. The proportion of matching assets relative to liabilities in these schemes was between 25% and 35%.

Released by Redington and Pension Corporation, the research surveyed 44 actuaries working in UK pensions.

The actuaries were not blind to the risks posed by their schemes’ structural underhedging. The majority planned on addressing the situation, with 75% of respondents claiming that their schemes would likely or almost certainly carry out a buyout or buy-in in the next three years.

Some observers are troubled by the pension schemes’ apparent willingness to adopt such large risks.

Jay Shah, the co-head of business origination for the Pension Insurance Corporation, cautioned, “Pension schemes are continuing to take big risks of inflation eroding away investment returns and funding positions deteriorating.”

The specter of inflation has haunted European pension funds for some time. According to a Mercer survey released last month of managers of European pension funds representing over $812 billion, an overwhelming 80% of respondents claimed that they were growing more concerned about the threat of rising inflation.

Tom Geraghty, Mercer’s head of investment consulting for Europe, Middle East and Africa, explained at the time that “the last 12 months have been characterized by a general sense of unease and rapid swings from optimism to fear and back again. The use of loose monetary policies and quantitative easing has created the ideal environment for the re-emergence of inflation, which is a cause for worry for many pension funds.”

Forecasters have already predicted that pension schemes in the UK will begin to offload large amounts of defined benefit liabilities in the near future. Pension consultancy Hymans Robertson claims that in the next 18 months, $32 billion in liabilities will be transferred from UK pension schemes to banks and insurers, leading to a record number of deals to complete buyouts, buy-ins, or longevity swaps.