In this analysis of the FTSE350 defined benefit (DB) pension schemes, we assess how Covid-19 has tested scheme investment strategies and what this means for future decision-making.
The economic impact of the pandemic has put substantial pressure on the funding level of DB schemes, with the level of investment risk being the key determinant of performance over recent months. Most schemes are now likely to be in a worse position than expected at the start of the year, making the path to endgame more of a challenge.
On average, the FTSE350 schemes need to achieve an additional annual return of 1.4% p.a. to reach their endgame in the timescales expected at the start of the year
Schemes expecting to buyout within 5 years at the start of the year would need an additional annual return of 2.6% p.a. to maintain the same timescales
On average, investment returns of 3.4% p.a. would be needed to maintain the endgame timescales schemes expected at the start of the year
Investment market turmoil
The pandemic caused a sudden fall in global equity markets, while bond yields also fell as a result of the actions taken to stimulate developed economies. This caused a large divergence in the funding level of DB schemes, with schemes running a higher level of investment risk experiencing a far more difficult year than schemes with well-hedged strategies.
Companies and trustees should understand how events have impacted their scheme and assess whether this is consistent with their investment risk appetite. The implications for the journey to the scheme’s endgame should also be investigated. In some cases, a new plan will be needed, while others will need to adapt existing strategies. Some schemes in the earlier stages of their journey may still have time to navigate back through investment returns alone, but will need to consider how best to allocate their risk budget and make the most of current market opportunities to do this.
Assessing the opportunities
The investment market turmoil has created opportunities to capture value in some pockets of the market. Companies and trustees should be actively exploring these options as they seek ways to get their endgame plan back on track.