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The Actuary The magazine of the Institute & Faculty of Actuaries

Pensions on the edge

The chorus of those questioning the logic of pension scheme investment in equities grew louder again this month.

The collective pension deficit of Britain’s top 100 companies fell about 20 per cent or £13bn last year as the stockmarket surged and corporate contributions to retirement plans doubled. However, a lacklustre performance by shares this year is again bringing the deficit issue back into focus.

The proportion of equities in British pension portfolios has fallen back to the level it was 20 years ago after peaking above 80 per cent in the early 1990s, but still remains at just under 70 per cent. There are no guarantees equities will produce the returns of the past or that funds will revisit the halcyon surplus days of the 1990s, when firms took contribution holidays. ‘We think the government is going to make sure companies fund these schemes better on a year-on-year basis, so the logical extension is that they’re going to have to put more cash in’, Alistair McCreadie, credit analyst at ABN AMRO bank, said.

The combined pension deficit of the FTSE 100 companies is £42bn, but this masks the very high exposure of some companies with big funds to equity markets such as Rolls Royce, BAE Systems, ICI, and British Airways.

Stephen Cooper, head of valuation and accounting at UBS investment bank, said companies should give up attempting to leverage the supposed superior returns in equity markets to try and reduce the costs of their pension funds and should switch to more predictable and tax-efficient returns from bonds.

These sentiments were echoed by top actuary Lindsay Tomlinson who wrote ‘strategic asset allocation work is driving many DB funds to reduce risk by investing to a greater extent in fixed income and index-linked securities. This trend has a lot further to go’.

‘Strategic asset allocation has been brought to prominence by a combination of the new accounting standard and changed investment conditions – a deadly cocktail for DB funds. As far as investment conditions go, the major issue is not the bear market in equities; it is the fall in long-term interest rates which has, unusually, accompanied it. Add on improving mortality and the perfect storm has ensued’, Tomlinson added.