Data crunch: A new report from consultancy Barnett Waddingham has found that the coronavirus crisis has exacerbated the funding divide between UK defined benefit schemes, with severe implications for those at the bottom of the pile.
The report, based on a survey covering 250 private sector DB schemes with assets of more than £1bn, predicts that the 13 per cent of schemes surveyed with funding levels at or exceeding 120 per cent will see little impact from the pandemic, but the situation becomes increasingly dire as funding levels decrease.
Schemes whose funding level is at or below 80 per cent will suffer most from market volatility, with significant consequences for their endgame planning.
The impact will vary dramatically for each scheme depending on the level of investment risk being taken
Paul Houghton, Barnett Waddingham
“Those hit hardest may need to rethink their strategy entirely,” according to the company.
“Few schemes are likely to emerge unscathed from the crisis,” the report states, but their relative health “going into the crisis is a key indicator of how much they will be impacted… and how quickly they recover afterwards”.
While well-funded schemes are largely shielded from market turmoil thanks to their low-risk investment strategies and high levels of hedging, schemes that were poorly funded going into the crisis are unlikely to benefit from the same level of protection.
Equity allocation has halved over the past five years and now accounts for just 13 per cent of the average asset allocation, the report states. But what exposure remains is disproportionately placed among schemes in worse funding positions, which tended to have higher-risk investment strategies when the crisis hit.
The result is a widening gap between the best and the rest, with the crisis brought about by the pandemic hitting hardest those schemes that were already struggling to improve their funding levels. It is yet another instance of coronavirus outcomes being determined by pre-existing conditions.
Commenting on the report, Paul Houghton, partner at Barnett Waddingham, said: “Before the Covid-19 pandemic hit, DB pension scheme trustees had a relatively clear view of their long-term strategies.”
Not all schemes will have had their plans spoiled, he said, but “the impact will vary dramatically for each scheme depending on the level of investment risk being taken, illustrating the importance of monitoring funding strategy progress for all schemes during the current crisis”.
Illustrating just how vast the gap in outcomes could be between funds at opposite ends of the funding spectrum, he said: “A lot of companies and schemes will be able to bear a certain amount of short-term volatility and will be able to accept a longer journey to endgame where necessary. For others, however, this might mean going back to the drawing board and a complete rethink of their DB endgame journey plan.”
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There is some qualified good news, he added, “due to widening corporate bond spreads and falling inflation expectations offsetting negative investment performance”.
“It may be the case, therefore, that the funding positions we see in next year’s survey remain reasonably steady, or even improve for well-hedged schemes – this is positive from a company balance sheet perspective, but unfortunately does not reflect the position on a statutory funding measure.”
