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Pension Funds

Returns, contributions push average FTSE 350 company pension funding above 100% – report

Investment returns and company contributions helped lead to a jump in funding levels for FTSE 350 company pension funds, show data by Goldman Sachs Asset Management.

The firm's global portfolio solutions team published Monday its fifth annual review of defined benefit funds sponsored by the 350 largest companies in the U.K.

These pension funds had an average funding level of 104.5% at the end of 2017, up from 99.2% a year earlier.

Investment returns added 5.9 percentage points to accounting measures of funding levels, said a report of the data. GSAM added that taking risk paid off for pension funds, with the MSCI World index returning 12.4% in 2017 on an unhedged basis.

Company contributions added 2.1 percentage points to funding levels. The report said contributions were largely stable over recent years. However, within the data GSAM found dispersion among funding levels depending on the size of the pension fund and its risk management. Those pension funds that were negatively hit by funding volatility tended to be at the smaller end of the size scale. Smaller pension funds — with less than 100 million ($131 million) in assets — were almost 15 percentage points in funding worse off than their larger counterparts when it comes to funding. These smaller funds also have higher funding level volatility than larger funds. Specific figures were not available.

"Whilst the funding rate of smaller pension schemes improved this year, we see much greater volatility in their funding position than larger schemes who have consistently improved their funding level every year of the four years we have run our FTSE 350 study in the U.K.," said David Curtis, head of U.K. and Irish institutional business at GSAM, in a statement accompanying the data and report. "This highlights that larger schemes better implement risk management strategies that protect and advance pension scheme solvency consistently."

Shoqat Bunglawala, head of the global portfolio solutions group for Europe, the Middle East and Africa and Asia-Pacific at GSAM, warned in the same statement that pension funds will likely need to navigate higher interest rates in some markets over the coming year, as well as "continued conflicts around trade, Italian budget negotiations and other macroeconomic risks that come with being in the late stages of the economic cycle."

U.K. funds will also have to deal with the outcome of the U.K.'s exit from the European Union.