Scheme sponsors ‘underwriting £100bn of investment risk’ – Lincoln

FTSE 350 companies with DB liabilities are underwriting almost £100bn of investment risk in their pension schemes with those schemes most reliant on their supporting companies taking the greatest risks, says to Lincoln Pensions.

The advisory firm says the aggregate value-at-risk of pension schemes of constituent companies in the FTSE 350 stands at £100bn, and adds that pension schemes that have a higher dependence on the sponsoring employer relative to the strength of their employer covenant have among the highest allocations of riskier return seeking assets. It suggests that schemes may be trying to invest their way to full funding and in so doing may be taking too much investment risk rather than seeking increased contributions from their employers.

FTSE 350 members, 225 of which have pension schemes, disclose an aggregate accounting deficit of approximately £72bn as at their most recent accounting dates. 


Lincoln Pensions argues that ‘employer dependence’, which it describes as the aggregate of the funding deficit and the value-at-risk from time to time, is a key measure that schemes should assess when considering the financial capacity of the employer to underwrite the scheme. 


Across the FTSE350 the average share of a scheme’s assets invested in riskier return seeking assets was just over 44 per cent.

Lincoln says it has found limited evidence that the investment risk profile of schemes is being set in the context of the employer covenant standing behind it, contrary to the expectation of the Pension Regulator (“TPR”) in its Code published in July 2014. 


It argues this is building up risk in the DB system by placing greater reliance on the employer to stand 
behind sometimes disproportionate investment risk. 


Lincoln Pensions managing director Matthew Harrison says: “Building a clear picture of the risk and volatility in a scheme’s investment profile should be a key consideration for both pension trustees and employers as they assess its overall risk profile of the scheme and its reliance on employer support. 


“What is perhaps surprising however, is the share of return seeking assets does not decrease as the schemes get larger in the context of their employer despite clear guidelines in TPR’s code of practice on Funding Defined Benefits. 


“We hope that this analysis may lead to scheme funding discussions which move away from the historic focus on funding today’s deficit, towards a greater understanding of investment risk volatility and a balance in the scheme’s overall risk profile.”