The Global Portfolio Solutions (GPS) team within Goldman Sachs Asset Management (GSAM) released a white paper on the defined benefit pension schemes of FTSE 350 companies this week, which painted a rather bleak picture of the state of the UK pension market.
David Curtis, head of UK and Irish institutional business at GSAM told Funds Europe that one of the main issues is that pension schemes are not focusing enough on the investment part of their strategies, instead concentrating on whether to hedge the ever-growing liabilities.
The report contains a graph that shows that five years ago GSAM predicted it would take 10 years for pension funds to be fully funded. This has now increased to 23 years for funds to be fully funded.
“Look at how big deficits are, whatever has happened up until this point it has not worked. Something has gone very wrong. There’s less chance of pensions being paid than at any other point,” said Curtis.
However, GSAM has a plan and it is three pronged; investments, market timing and corporate governance. Curtis said that more focus on investments could add 1.5% a year to pension assets, which after 15 years would be 25% compounded.
Market timing concerns the greater array of assets now available to pensions funds, including alternative assets. The more uncorrelated assets available to put into a portfolio, the more chance there is of gaining returns when markets move.
However, as Kathleen Hughes, head of European institutional sales at GSAM observes, pension schemes need to be nimble to make use of market timing.
“If it takes 6-8 months to reach a decision you’ve [schemes] missed the opportunity,” she said.
Pension schemes are consolidating and with larger assets can attract more professional trustees, hopes Curtis. If schemes can react to investment advice given in a timely fashion, it may be possible to close the funding gap sooner.
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