Most UK defined benefit (DB) pension schemes will rely heavily on investment returns, rather than seek additional cash from sponsors, to achieve their funding targets during the coronavirus crisis.
That is according to a study of pension scheme managers by Willis Towers Watson (WTW), which found that 36% are not making any changes to their journey plans in response to falling funding levels.
The findings also show that 31% are considering extending their time horizons, with only 15% saying that additional cash is needed to reach full funding.
WTW said that the research highlights the urgent need for pensions trustees to ensure they have a robust portfolio construction process in place during the COVID-19 pandemic.
“The impact of this crisis on markets and economies may still have a long way to go and nobody can forecast a path out of it with a great deal of confidence,” said Pieter Steyn, head of WTW's UK fiduciary management business.
“However, for schemes relying on investment returns rather than cash, we would prefer much more diversified growth asset exposure at present; for example, diversifying away from equity assets into liquid alternatives to reduce risk.”
A total of 90 UK-based pension scheme managers and trustees took part in the study, finding that 37% are finding it hard to make decisions in this uncertain environment.
Over 22% said that strategic initiatives had been diverted or delayed, while 11% are struggling with enough time and resources to divert to pension issues.
However, only 8% said IT infrastructure or remote working challenges were reducing committee effectiveness, suggesting that many have managed to adapt relatively seamlessly to a new way of working.
WTW outlined four key priorities for trustees and pension scheme managers to consider during the COVID-19 pandemic, which include:
- Making growth assets as robust as possible by diversifying away from equities
- Hedging any unrewarded risks as far as possible. Consider increasing liability hedging, even at current yields
- Revisiting risk and return needs, but don’t allow any lengthy strategy review to delay the urgent need to review portfolios
- Review roles and responsibilities. Increase expertise by delegating areas that are sub-optimal and ensure access to a full opportunity set of investments.
“Good governance sets organisations apart and in crisis situations such as we are facing in the midst of this pandemic, those schemes with good governance structures were better prepared going into this environment and will be better equipped to respond to stressed circumstances," Steyn added.
Author: Chris Seekings
Image credit: iStock
