LGIM warns of poor performance of growth assets amongst DB schemes

Defined benefit schemes are suffering from poor performance from growth assets, Legal and General Investment Management (LGIM) has warned.

According to LGIM’s latest DB Health Tracker results, a typical DB pension scheme can ‘expect’ to pay 93.7 per cent of accrued pension benefits, a decrease of 2.9 per cent since the last quarter in their ‘expected proportion of benefits met’ (EPBM) metric.

Equivalently, the quarterly analysis, which takes into account the risk that a sponsor might default and the impact that would have on scheme’s members, found that 6.3 per cent of accrued pension benefits –– would not be paid on average across their scenarios. This is an increase of 2.9 per cent from 3.4 per cent at the previous quarter primarily due to poor performance of growth assets.

Commenting, LGIM head of solutions research, John Southall, said: “How manageable a pension scheme’s deficit is isn’t obvious purely from its size, but depends on a number of factors, including the strength of the sponsor, the size of the deficit relative to the size of the assets, the quality of the investment strategy, and the economic and demographic risks in the scheme.”

He stated that trustees may wish to consider a broader set of metrics to understand scheme solvency, guide investment strategy and support integrated risk management for their scheme.”

“Asset performance, as well as changes in nominal bond yields and expected inflation all had an impact over the last quarter, resulting in an overall decrease in our EPBM metric for a typical scheme. Trustees could stand to benefit from revisiting their investment strategies, potentially targeting higher returns, increasing diversification and using leveraged LDI. Based on our model, this could see our EPBM metric improve to 95.2 per cent.”

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