FTSE 350 DB pension schemes carry £100bn of investment risk

The FTSE 350 companies are carrying considerable financial risk within their defined benefit (“DB”) pension schemes  according to a new report from Lincoln Pensions. Lincoln Pensions estimates that they are underwriting almost £100bn of investment risk (being the aggregate value-at-risk of pension schemes of constituent companies in the FTSE 350) in their pension schemes. The FTSE 350 members, 225 of whom have pension schemes, disclose an aggregate accounting deficit of approximately £72bn as at their most recent accounting dates.

The findings show that pension schemes with the highest employer dependence relative to their employer covenant have among the highest allocations of riskier return seeking assets indicating that schemes may be trying to invest their way to full funding. In doing this they may be taking too much investment risk relative to the employer covenant rather than seeking increased contributions from their employers.

Across the FTSE350 the average share of a pension scheme’s assets invested in riskier return seeking assets was a little over 44%.

Lincoln also found that contrary to the expectation of the Pension Regulator (“TPR”) in its Code published in July 2014, there was limited evidence that the investment risk profile of Pension Schemes is being set in the context of the employer covenant standing behind it.

Commenting on the research, Matthew Harrison, managing director of Lincoln Pensions, said: “Building a clear picture of the risk and volatility in a scheme’s investment profile should be a key consideration for both pension trustees and employers as they assess its overall risk profile of the Pension Scheme and its reliance on employer support.

“What is perhaps surprising, however, is the share of return seeking assets does not decrease as the schemes get larger in the context of their employer despite clear guidelines in TPR’s code of practice on funding defined benefits.

“We hope that this analysis may lead to scheme funding discussions which move away from the historic focus on funding today’s deficit, towards a greater understanding of investment risk volatility and a balance in the scheme’s overall risk profile.”

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