Over 70% of UK defined benefit (DB) pension schemes are cashflow negative, with more benefits being paid out than contributions being received, while in Europe as a whole the figure stands at 64%.
In the UK, this marks an increase of cashflow-negative DB plans of 7% since 2018. The key driver behind this year-on-year increase is the maturity of these plans, with many now being closed both to new members and new benefit increases.
Throughout Europe, including the UK, 72% of DB pension schemes expect to become cashflow negative within the next ten years, according to the latest asset allocation survey by pensions and investment consultancy firm Mercer.
“Whilst a normal scenario for a DB scheme approaching maturity, being cashflow negative presents some specific challenges as assets need to be properly managed in order to meet cashflow and collateral needs,” the report stated.
Disinvesting assets remained the most common method to meet cashflow requirements amongst 91% of respondents – yet this year has also seen increases in alternative ways to meet liabilities.
Nearly 50% of respondents now leverage investment managers to distribute income from investments. Back in 2018, 43% employed this tactic.
“While 2019 has so far been marked by cautious optimism, investors need to be very aware of an ever-evolving macro-economic and political backdrop,” said Mercer’s chief investment officer in the UK, Jo Holden.
“Mounting evidence of over-extension of credit, possible liquidity implications as central banks rein in their market involvement, and continuing political fragmentation, all mean investors should consider effectively positioning their portfolios to weather possible market volatility.”
The survey also found that sustainability is “gaining momentum” among European institutional investors. Over 50% now consider environmental, social and governance (ESG) risks in their schemes, up from 40% in 2018.
Of these, 60% said that regulatory pressure is the main driver. Mercer said that it expects this trend to continue. Further regulations in the UK will require pension funds to take ESG factors into account when making investment decisions.
“We expect the increasing focus on sustainability to continue and anticipate it will soon be seen as an integral part of investment idea generation and risk management,” Holden said.
Investors in Europe and the UK have continued to diversify strategies away from equity exposure, the survey also found. The average equity holding has fallen to 25% in 2019, down from nearly 30% last year. Allocations to real assets and hedge funds have increased by 4% and 6%, respectively.
Mercer surveyed 876 institutional investors across 12 countries, representing around €1 trillion in assets under management.
©2019 funds europe
