Unless they begin to plan properly now, smaller schemes will not be able to cope with the impact of extreme market volatility in the future, Eamonn O’Connor, head of investment at Bluefin, warns.

 

 

He said: “Current market volatility has dealt a double blow to UK pension schemes. Both equity prices and gilt yields are falling, hitting both asset and liability values.  It’s clearly unwelcome but schemes can just about cope, in part thanks to the fact that they are cashflow positive.”

A recent survey showed that one in five Local Government Pension Schemes (LGPSs) have turned cashflow negative (that is, pension payments exceed contribution income) with potential for this to reach one in two if employee membership reduces as expected.

With the majority of private sector schemes now closed to new members and many to future accrual of benefits, it will not be long before many are in the same boat.

Mr O’Connor continued: “Schemes will become far more reliant on asset returns (as well as sponsor contributions) to make good an asset shortfall, but these returns will be realised on an ever shrinking pool of assets.

“If schemes have not reached a position of greater self-sufficiency by the time they turn cashflow negative, they will be extraordinarily vulnerable to volatility.  Market conditions, such as we are currently witnessing, could be enough to sink schemes and their sponsors.”

Small schemes in particular should be aware of how pension payroll will develop over the next few years and whether there are any significant retirements coming up.  Holding appropriate assets is crucial; unprepared trustees may be forced to realise assets when prices are low and so consolidate a “loss”.  A joined up approach between actuarial and investment advisers is crucial, says Bluefin.