News & analysis
DEFINED CONTRIBUTION PENSION SCHEME GOVERNANCE NOT UP TO SCRATCH – REPORT
A report has called for governance standards in defined contri- bution (DC) schemes to be improved as the system will increasingly dominate retirement packages in the next decade, while technological advancements are changing the way schemes interact with their members. The Global Pension Assets Study by not-for-profit savings cam- paigner the Thinking Ahead Institute said developing the high decision-making standards necessary in complex organisa- tions would be a “big governance challenge” as DC schemes become the global pensions market model.
DC assets in the six largest pension markets outstripped those of defined benefit (DB) funds for the first-time last year, the report said. Marisa Hall, co-head of the Thinking Ahead Institute, said member engagement is critical for a stronger DC system, but remains an unresolved issue for many schemes. “We expect this to be an area of particular focus for leading DC
organisations as the next generation of plans takes shape,” she added. Governance also needs improving due to technological advances changing the way schemes interact with their mem- bers, creating new possibilities. “The future of DC is likely to be hyper-customised, with increased focus on individual participants, but many schemes need to improve their governance to fully embrace this,” Hall said. “In the multi-device world, and the increased use of social media, members now expect their DC pension arrangements to be communicated in an easily accessible fashion. DC pen- sions management via smartphones is becoming the norm, much like banking on the go.” The report also pointed out that pension schemes would be subject to stronger saver and investor protection regulations in the next five to 10 years.
It also forecast that a growing focus on sustainability among pension funds over the next decade would see a “significant” re-allocation of capital towards climate change themes.
DEFINED BENEFIT SCHEME SHIFT TO BONDS HIGHLIGHTS YIELD RISKS
Defined benefit (DB) schemes are continuing to shift their portfolios towards fixed income and away from equities but investment
risk remains a key concern, particularly for
schemes with higher deficits, Pension Protection Fund (PPF) data has revealed.
While the overall deficit in the PPF’s universe fell to £160bn from £188bn last year, partly due to the updated s179 valuation guidance, funding ratios of smaller schemes have declined. In the event of a further fall in gilt yields, this could leave schemes at risk of a double whammy of declining funding ratios and falling returns. Stephen Wilcox, the PPF’s chief risk officer, said: “While many schemes have reduced their investment risk, the number in deficit is more than double what it was in 2006 and the eco- nomic circumstances much less favourable. The funding ratio of schemes in deficit is particularly vulnerable to economic shock. “Although the PPF is much better equipped to manage that risk than we have ever been – our own funding ratio is stable, we have years of experience under our belt and we have a healthy reserve to fund future claims – the potential claims of underfunded schemes pose a significant risk, which is beyond our control,” he warned.
Of the remaining 5,422 DB schemes in the PPF’s universe, the 8 | portfolio institutional March 2020 | issue 91
average equity allocation fell to 24% from 27% while the pro- portion invested in bonds rose to 62.8% from 59%. In 2006, the allocation to fixed income was 28%. This picture is supported by data from Aon’s annual Global Pension Risk Survey, which found that 40% of respondents anticipated further reductions in their equity allocations in the next 12 months.
Index-linked bonds made up the largest proportion of DB schemes’ fixed income allocations at 46.2%, a figure little changed from the previous year, suggesting that investors con- tinue to anticipate an uptake in inflation. This is despite Office for National Statistics data showing a decline in CPI inflation to 1.4% in January, down from 1.8% a year earlier. Meanwhile, 28.4% of schemes were invested in corporate bonds and just over a quarter in government issued fixed-inter- est bonds. The PPF said that smaller schemes were more likely to have higher proportions in government and fixed interest bonds than index-linked bonds. Within equities, the UK-quoted proportion fell to 16.6% from 18.6%, while the proportions of overseas-quoted and private companies increased slightly to 69.7% and 13.7%, respectively. Smaller schemes tend to hold higher proportions in UK equi- ties with smaller proportions in overseas and private compa- nies, according to the Purple Book.
The best funded schemes, the PPF believes, tend to have the greatest proportion of their assets invested in bonds and a smaller proportion invested in equities.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48
