The majority of UK defined benefit pension schemes expect to extend their time horizons to reach full funding, rather than seek additional cash contributions from sponsors, according to a Willis Towers Watson survey of UK pension schemes in the wake of Covid-19.
The survey of 90 UK-based pension scheme managers and trustees found that while 36 per cent were not making any changes to their journey plan in reaction to falls in funding levels, 31 per cent were considering extending their time horizons, with only 15 per cent saying additional cash was the answer.
As a result, the majority of pension schemes will be relying heavily on achieving consistent investment returns over the long term, emphasising the urgency for trustees to ensure they have a robust portfolio construction process in place.
Respondents also highlighted a number of governance challenges that they are currently facing. 37 per cent said they are struggling with making decisions in this uncertain environment, while over 22 per cent said that strategic initiatives had been diverted or delayed, whilst 11 per cent are struggling with enough time and resources to divert to pension issues.
Only 8 per cent said IT infrastructure and/or remote working challenges were reducing committee effectiveness, suggesting that many schemes have managed to adapt relatively seamlessly to a new way of working.
Willis Towers Watson has identified four key priorities that trustees and pension scheme managers should consider if their scheme is behind its journey plan or if they face the additional challenge of a weak sponsor, in this highly uncertain market environment:
- Make growth assets as robust as possible by diversifying away from equities.
- Hedge any unrewarded risks as far as possible. Consider increasing liability hedging, even at current yields.
- Revisit risk and return needs, but don’t allow any lengthy strategy review to delay the urgent need to review the portfolio.
- Review roles and responsibilities. Increase expertise by delegating areas that are sub-optimal and ensure access to a full opportunity set of investments.
Pieter Steyn, head of Willis Towers Watson’s UK Fiduciary Management business, says: “Good governance sets organisations apart and in crisis situations such as we are facing in the midst of this pandemic, those schemes with good governance structures were better prepared going into this environment and will be better equipped to respond to stressed circumstances.
“Schemes may need to revisit their long-term strategy in the months ahead but any review should not get in the way of the need to diversify. The impact of this crisis on markets and economies may still have a long way to go and nobody can forecast a path out of it with a great deal of confidence. However, for schemes relying on investment returns rather than cash we would prefer much more diversified growth asset exposure at present; for example, diversifying away from equity assets into liquid alternatives to reduce risk.
“Crisis situations can also provide an opportunity to reflect by asking whether the portfolio is fit for purpose, whether the scheme was less protected than expected and whether the existing governance model worked optimally to enable trustees to adapt investments where necessary for these rapidly changing circumstances.”
