Over half, 55 per cent, of the UK’s defined benefit pension schemes are cashflow negative, Mercer has revealed.

According to Mercer’s 15th European Asset Allocation Survey, 55 per cent of DB schemes are currently cashflow negative, up from 42 per cent in 2016 and with 85 per cent of the remaining schemes expecting to be cashflow negative by 2027.

The firm noted that cashflow negative schemes lack sufficient income from investments and contributions to meet member benefits, therefore, need to sell assets to meet liabilities. As a result of this, these schemes are more vulnerable as they could be forced to disinvest during a period of market stress.

The report also highlighted that de-risking continues to be a “dominant trend” among UK pension schemes, with 47 per cent of respondents stating that their long-term finding objective was self-sufficiency. A further 36 per cent focused on their technical provisions liabilities and 17 per cent targeting buy-outs.

In terms of investments, the survey found that schemes are investing in alternative assets that offer some additional return in exchange for reduced liquidity and greater complexity in addition to giving a regular income stream. Average alternatives allocations rose to 22 per cent in 2017 from 21 per cent in 2016, and up from 4 per cent in 2008.

Additionally, UK scheme equity allocations have halved from 58 per cent in 2008 to 29 per cent in 2017. Participants of the survey stated that they intend to further cut equity allocations in the years to come.

The 2017 report collated information from 1,241 institutional investors across 13 countries, reflecting total assets of around €1.1trn.

Mercer global director of strategic research Phil Edwards said: “While many private markets have seen significant inflows in recent years, opportunities remain for high quality managers to extract returns in less liquid and more complex markets. This is especially true in areas where the supply of capital remains constrained.

“Being cashflow negative is a natural life stage of a mature DB pension scheme, of course, but recent stock market performance may have lulled some into a false sense of security. Our report highlights that less than 40% of schemes have a formal de-risking journey mapped out. This leaves a large body of schemes with no clear plan in place.

“Trustees of cashflow negative schemes need to be sure that, in the event of a large market correction, liquid assets are available to meet cashflow and collateral needs, without requiring the scheme to crystallise losses. We would encourage all schemes – large and small – to use scenario planning and stress-test analysis to understand how a market correction might impact their financial health.”

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