Pension schemes increasingly focusing on liquidity, PwC research suggests

Dec 06, 2018

Four in five pension schemes believe they are likely to become cash flow negative within the next five years and are considering changing their investment strategy, a new report from PwC indicates.

PwC’s Pension Investment and Governance Survey shows that schemes are increasingly looking towards lower risk, higher yielding assets, leading to an increased interest in illiquid assets matching scheme cashflows. The survey of corporate sponsors and scheme trustees also found increasing allocation to liability driven investments (LDI) and to hedge interest rate and inflation risks.

Sinead Leahy, head of pension investment consulting at PwC, said:

“It’s no surprise that people leading investment strategy are thinking more closely about how their assets can be better matched to their liabilities as schemes mature.

“The survey also indicates a widespread agreement that valuation methods need to be more closely aligned to investment strategy. Just over seven in 10 respondents said now might be the time to consider alternative valuation methodologies. This is understandable given that falling gilt yields have increased deficits for many schemes highlighting the mismatch between assets and liability valuation methods.”

The survey also suggests:

  • More than 50% of schemes still manage funding, investment and covenant separately;

  • Nearly two thirds feel that their current investment strategy is on track to reach full funding within agreed recovery periods, without additional support from their sponsor; and

  • Seven in 10 schemes review investment strategy at least annually.

Sinead Leahy added:

“Governance is clearly an area that’s increasingly under the spotlight and that will continue to be the case following the publication of the CMA’s review into of the investment consultants market. The survey suggests that of the schemes which have fiduciary management, only half conduct an oversight of their provider every year.

“As the CMA recommendations begin to have an impact, we expect to see an upturn both in greater scrutiny when selecting a fiduciary manager and the oversight of these arrangements.”

As investment strategy increasingly becomes a lever for trustees and sponsors to meet their scheme’s obligations, nearly seven out of 10 respondents say they conduct reviews of their investment strategy at least annually. Larger schemes (those with assets over £1bn) are likely to conduct reviews more regularly.

Ends

Notes for editors

  1. A total of 101 corporate sponsors and scheme trustees responded to the survey

  2. For more information please visit www.pwc.co.uk/pensions

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