Many major companies are failing in their pension duties
Following the publication earlier this week of Pricewaterhouse Coopers’ Pension Support Index, it seems that the corporate world might just be waking up to what we, at the deVere Group, have been saying about final salary pension schemes for quite a while: that the time has come to revise traditional thinking on investment strategies to cover pension obligations.
For too long, stakeholders have been piling into government bonds, as they were considered a ‘safe haven’ in these challenging financial times. However, with yields on these gilts at historic lows, due to the ongoing weak economic growth, it is necessary to ‘take the bull by the horns’ and adopt a new attitude to risk.
Published officially on Sunday, the PwC’s Pension Support Index, which monitors FTSE350 companies’ pension ‘black holes’ compared to their assets and profits, remained at 74 out of a possible 100 from December 2011 to June 2012 – far below the 88 achieved in 2007 – which confirms that the time has come for firms to reduce their holdings of such bonds and increase their exposure to well-diversified portfolios which could provide far better returns.
Failure to adopt a fresh attitude to investment risk taking will mean that firms will increasingly have to use their profits, at a time when profits for many are already low, to cover their pension deficit. And this will hamper the UK’s economic growth and put the retirement plans of millions in jeopardy.
PwC’s Jonathon Land, said in a statement: “We are no longer in a standard economic cycle. We are living in a world of low interest rates and investment returns and relatively high inflation, meaning that without action, pension scheme liabilities are likely to remain at their present high levels.”
The scale of the deficit outline in this week’s study is truly alarming, but even that might not tell us the whole picture when it comes to companies’ pension funding gaps.
For example, recent findings from the Pension Protection Fund, set up to protect members of schemes when firms fail, showed the total deficit of British final-salary pension schemes had more than doubled in the space of a year – to a staggering £231bn.
Such drastic times, surely, call for a drastic revision of the investment strategy status quo.
Nigel Green deVere Group
Blog written November 27th