The smallest pension schemes among U.K. companies on the
FTSE 350 index will need to recover from the biggest decline in
funding levels last year, according to a research report from
Goldman Sachs Group.
In its annual review of Britains defined benefit
market, Goldman Sachs Asset Management found that schemes with
less than £500 million ($653 million) in assets saw a 6.6
percent drop in funding levels, compared to a 1.4 percent
decline for those with more than £500 million. The
pensions were hurt by weakness in sterling, tumbling bond
yields and liabilities outpacing growth assets, according to
the firms research released Monday.
The report, entitled Trouble Beneath the
Surface, suggests the problem is likely much more severe across
the U.K. because 85 percent of the regions schemes have
assets of less than £500 million, whereas only 47 percent
of FTSE 350 pension schemes are that small. The funding gap
highlights the need for each scheme to review risk management
so retirees can receive the pension payments they were promised
to live in financial security.
Size matters and life is harder for small
schemes, said Steve Webb, director of policy at Royal
London and a former U.K. pensions minister. Small schemes
need to be looking at what larger schemes have done and see if
any larger schemes have adopted a viable de-risking or hedging
The U.K. government is planning to issue a report on the
pension sector later this year, but any changes it brings may
not arrive fast enough. Any legislation resulting from the
Department of Work and Pensions report will be at least
two years away, Webb said, and there are problems
that need addressing now.
There is wider evidence that larger schemes are finding it
easier than smaller ones to reduce shortfalls in funding.
Assessing more than 160 U.K. schemes with assets over £1
billion, a Barnett Waddingham research paper earlier this month showed that 57
percent had a deficit in the year through October 31, lower
than 67 percent a year earlier.
The U.K.s Pensions Regulator said in its annual report, released in June, that a majority
of Britains defined benefit schemes are on track to be
fully funded at the date when their pensioners need to be paid.
But Webb said its important that regulators consider size
when looking at the U.K.s 5,800 DB schemes because the
amount of assets they manage may restrict how they can invest.
That, in turn, can influence performance relative to larger
The Pensions Regulator also noted in its annual report that
the number of members with defined contribution schemes, where
employees are responsible for their own retirement savings,
outstripped those with DB plans managed by their companies, for
the first time.
For many chief executives, funding a pension scheme is
not going to be their biggest priority, said Patrick
Connolly, an investment consultant at Chase de Vere. What
is keeping them in a job is paying dividends to shareholders
and increasing the share price.