“While deficits have grown for a number of years and there has been much commentary on the size of deficits, our concern is that some trustees and others involved with the management of schemes may not fully appreciate the magnitude of the problem,” said David Curtis, Head of UK and Irish Institutional Business at GSAM. “We believe the time for waiting has passed and action needs to be taken.”
“Our review has highlighted that managing pension schemes is an increasingly complex job that requires specialist help,” said Shoqat Bunglawala, Head of Global Portfolio Solutions for EMEA at GSAM. “We believe the solution to this problem is a careful risk management approach which focuses on diversifying strategies and looking beyond traditional exposures to generate returns and uncover opportunities, while reducing unrewarded risks.”
Additional highlights of the report include:
• Funding levels improved marginally in 2015 despite several offsetting factors. As shown in Exhibit 2, higher discount rates were the main driver behind the higher funding levels with investment returns and sponsor contributions largely offsetting service and interest cost.
• However, year-to-date funding levels have declined significantly, particularly since the results of the UK Referendum on EU membership. As a result, schemes are still a long way from reaching their funding goals in order to meet all future benefit payments with a high degree of confidence and minimal reliance on the sponsor. We estimate that, since the beginning of the year, on an accounting basis for companies with a December Fiscal Year End, liabilities are 34% higher and funding levels are 10% lower.
• We estimate investment returns for companies with a December FYE were 1.7% for 2015, meaningfully lower than prior years and in part driven by muted equity performance. These muted investment returns are a reflection of the fact that the global developed economy is in the late stages of its current expansion, a trend that we see continuing into 2017.
• In light of these challenges, we believe it is essential that schemes re-examine longstanding investment beliefs and incorporate new techniques, including an increased focus on diversification, the application of more agile investment strategies to incorporate market views and more efficient hedging of liabilities to reduce risk.
• Some schemes have embraced these strategies more than others. We examine why some schemes may have a greater focus on risk management than others, and why there may be a gap between what schemes should do and what they are doing. We find that many schemes are considering enhanced governance models to address the gap.
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