FTSE 100 DB schemes took steps to tackle investment mismatching

Written by Oliver Wade

FTSE 100 DB schemes recently took “significant” steps to combat investment mismatching over the year to 31 December 2017, according to the most recent report from JLT Employee Benefits (JLT).

The study revealed that ten schemes switched more than 10% of assets into bonds during the period, which pushed the average scheme allocation to bonds up 64%, representing a 2% rise on the previous year and up from 35% a decade ago. Nearly two-thirds of FTSE 100 schemes (64) now have over 50% of assets in bonds.

JLT reported that investment mismatching persists across some of the UK’s largest schemes, despite the uptick in the aggregate bond allocations. Large equity positions allowed UK blue chip sponsors to benefit from risking markets through the second half of 2017, which, when combined with significant sponsor contributions, supported a 34% improvement in aggregate funding levels.

During the period, it is estimated that the FTSE 100 DB pension scheme deficit dropped by £14bn to £41bn, with 53 companies reporting a significant deficit funding contributions in their most recent annual reports and accounts as sponsors offset balance sheet risks with cash injections. JLT found that total contributions fell to £8.7bn, a decrease from the £11.3bn reported in the previous year, headlined by a £1bn sponsor contribution from a single index constituent.

However, total deficit contributions were dwarfed by dividends declared across the index, as 39 companies could have potentially settled their pension deficits in full with a payment up to one year’s dividend.

The total disclosed pension liabilities across the FTSE 100 continued to rise, reaching £695bn, up from £681bn the previous year.

Furthermore, the firm revealed that companies continued to tackle mounting pension liabilities by closing schemes to both future and current employees. Three of the top ten providers of DB benefits providers fell off this year’s list, as even the largest corporates brought an end to DB provision.

JLT chief actuary Charles Cowling said: “FTSE 100 pension schemes have clearly been proactive in taking steps to de-risk their schemes; the significant shift into bonds is certainly an encouraging sign of trustees’ and sponsor commitment to tackling scheme risk in the context of company balance sheets. It is also reflects pension schemes locking in gains as equity markets have powered ahead.

“That said, high levels of investment mismatching clearly persist. Equity allocations proved helpful to scheme portfolios through the second half of 2017, when strong market returns provided a much-needed boost to portfolio returns and supported improvements in underlying funding levels. However, market conditions in 2018 have delivered a much rougher ride and maybe as a result, pension schemes are increasingly looking at alternative investment strategies.

“A recent feature in pension scheme investments has been the emergence of CDI (cash-flow driven investment). CDI strategies allow investment in low risk matching bonds but at the same time offer higher returns through a diverse portfolio of multi-asset credit funds. While pension schemes have been keen to reduce risk, switching out of equities into bonds can mean an unwelcome call for additional funding on employers. However, developing CDI strategies are increasingly allowing pension schemes to reduce risk and at the same time retain sufficient investment returns to avoid the need for additional employer funding.

“With the growing interest in CDI strategies and the opportunities to lock in gains offered by recent strong equity markets, we expect to see the trend to de-risk pension schemes by switching out of equities to continue, and possibly even gather pace during 2018.”

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