Pensions: April monthly overview
As the government (and Labour opposition) outlined plans to revive the UK economy, the role of pension funds has come into sharp focus once again.
Over the past month, a lively debate appears to have kicked off around the latest implications of a seemingly obscure accounting standard FRS17 (introduced in 2000) which requires Defined Benefit (DB) pension scheme deficits to be disclosed on an annual basis. Critics now say this increasingly caused pension funds to move away from British equities and high-growth companies, thus eroding the UK’s attractiveness as a listing destination.
As a result, there has been a renewed focus on pension fund consolidation and investment performance as potentially “transformational” for the UK economy, as reflected within Chancellor Jeremy Hunt’s stated interest in reforming the fragmented British pensions landscape to bolster growth.
It has also prompted international comparisons. According to the OECD, 26% of UK pension fund assets in 2021 were in equities. By contrast, this allocation stands at 40% for Canada and 47% in Australia. North American and APAC pension schemes also have more leeway to invest in early-stage companies, maintaining exposure to fixed income whilst boosting infrastructure and private equity holdings.
Our own data showed that pension funding and deficits were the focal point of discussion last month, as overall DB scheme deficits increased amid falling gilt yields and banking sector turmoil. Looking closer however, fully hedged schemes saw the fruits of their de-risking efforts as they outperformed half-hedged schemes for the first time since interest rates started to rise significantly last year – according to Broadstone’s Sirius Index. This variation in funding levels reaffirmed the Pensions Regulator’s (tPR) recent call for schemes to review the appropriateness of their long-term funding targets, strategy, and risk levels.
Perhaps more notably, a growing turnaround in schemes’ fortunes has catalysed the market for buyouts. JPMorgan recently predicted that £600bn of pension liabilities could be transferred to insurers over the next decade. But as trustees and finance directors queue up to do deals, concerns have grown about the insurance market’s capacity to absorb these schemes. Insurers that take on pension schemes will need to hedge their interest-rate and inflation risks, which may mean wider risks to financial markets.
Elsewhere, findings of a recent PwC report – that only 14% of global companies surveyed had not suffered a data breach in the past three years – were made all the more salient as London-listed outsourcer Capita disclosed that hackers might have accessed customer data following a cyberattack on its servers in March.
This has only increased the scrutiny of myriad administrative, regulatory, fiduciary (and ultimately reputational) risk factors on pension scheme trustees’ agenda for the months ahead.
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