Pension schemes face a wait of almost 30 years if they plan to de-risk by buying gilts and should consider investing in other low-risk assets such as property and infrastructure, Towers Watson said today.
Based on current trends, the consultancy expects it to take until 2040 before there are enough index-linked gilts - government bonds linked to inflation - to fully satisfy UK pension fund demand.
Alasdair MacDonald, head of investment strategy at Towers Watson, said: 'Currently, the average UK pension fund is targeting a very low-risk investment strategy on a 20-year time horizon, which means that many of them will not meet this objective.'
Currently the high price of index-linked gilts is slowing down the pace of de-risking but Towers Watson said that 'rapid innovation' was starting to address the mismatch between supply and demand of gilts.
This includes schemes using risk transfer, where sponsors pass on their pension risk to outside parties such as insurers, and buy-ins, where the risk of meeting future benefits is also passed on to an insurer.
There are also a number of property and infrastructure assets which schemes can invest in to deliver low-risk index-linked cash flows. Schemes could also consider transferring risk to members by using methods such as enhanced transfer values because, unlike schemes, members cannot be compelled to buy gilts.
MacDonald said: 'UK pension funds of all sizes and liability structure need to be aware that there are a range of de-risking alternatives to suit most governance capabilities.'
According to the consultancy, if all UK pension schemes used these alternative strategies, the gap between supply and demand for index-linked gilts would balance around 10 years earlier than expected.
MacDonald added: 'While choosing an alternative de-risking option and when to implement it can be complex and time consuming, it may significantly shorten the de-risking journey with all the benefits that accompany that.'
