UK Pensions Under-Hedged: Survey

cones safetyResearch from UK-based Pension Corporation shows that trustees of the country’s DB pension funds could receive more than £100 billion in deficit reduction payments from their corporate sponsors over the next three years, or 13% of UK corporate cash holdings, according to a survey of more than 170 trustees and pension professionals, representing aggregate liabilities of at least £50 billion. The research, which surveyed UK trustees, also found that 46% of trustees expect funding levels to be worse than at the last valuation and that 37% of trustees expect to negotiate an increase in sponsor contributions with 20% of them seeking increased payments of more than 10%. A further 22% see their corporate sponsor as weaker than at the last valuation and 29% expect to see lower asset returns in the future.

At the same time, 41% of trustees view inflation as only a minor concern and 53% of trustees have taken no steps to reduce longevity, inflation and investment risk exposure.

With increased pressure on sponsors to reduce deficits, the survey demonstrated that UK trustees are concerned about the impact of market volatility on funding positions, yet are extremely under-hedged against the major risks: longevity, investment and inflation. For a typical pension scheme, which isn’t hedged for inflation, a 1% rise in long-term inflation expectations could see liabilities increase by around 20% noted the research report.