Smallest schemes 15% less well-funded compared to larger schemes

The smallest pension schemes are around 15 per cent less well-funded compared to the largest schemes, according to research by Goldman Sachs Asset Management (GSAM).

Publishing its fifth annual review of FTSE 350 defined benefit schemes, the Global Portfolio Solutions team within GSAM, found that smaller schemes have experienced significantly higher funding level volatility compared to larger schemes.

GSAM is concerned with its findings, given the shape of the UK pensions landscape. While nearly half (45 per cent) of FTSE 350 schemes are below £500m in size, around 87 per cent of schemes across the UK have assets of below £500m.

The report also outlines that while 2017 was a supportive year for FTSE 350 schemes, with relatively flat bond yields stabilising liability values and allowing growth assets to drive funding improvements, the year exposed individual scheme approaches to risk management. Many schemes, while seeing strong asset growth, were hindered by growing liability values through the year.

GSAM head of UK and Irish institutional business Dave Curtis, said: “Whilst the funding rate of smaller pension schemes improved this year, we see much greater volatility in their funding position than larger schemes who have consistently improved their funding level every year of the four years we have run our FTSE 350 study in the UK.

“This highlights that larger schemes better implement risk management strategies that protect and advance pension scheme solvency consistently. These strategies are made available to smaller pension schemes through the adoption of fiduciary management and we expect the increasing prevalence of fiduciary management to enhance scheme governance.”

However, 2017 provided some respite for FTSE 350 schemes following a challenging 2016. Returns across the spectrum of diversifying risk assets were positive, resulting in strong performance for the majority of pension scheme growth portfolios in the year, but the current market backdrop may prove more challenging for schemes over the coming months.

GSAM head of global portfolio solutions group EMEA and Asia Pacific Shoqat Bunglawala said: “In the next year alone, schemes are likely going to have to navigate higher interest rates in some markets, continued conflicts around trade, Italian budget negotiations and other macroeconomic risks that come with being in the late stages of the economic cycle.

“UK schemes, in particular, will be faced with their own challenges including the outcome of Brexit, potentially increasing interest rates and a volatile currency. In this environment, we think an enhanced focus on risk mitigation and a dynamic approach to asset allocation will prove invaluable.”

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