U.K. corporate and public defined benefit plan executives are looking at risk in different ways to solve similar funding problems, according to a report by Greenwich Associates.
Corporate plans are in a derisking mode, rotating domestic equities into fixed income and alternative assets, while public plans are taking on more risk in an attempt to bolster returns.
Public plans are “really frozen at the moment” while waiting for new government regulations such as an increase in retirement age and employee contributions to improve funding levels, said Marc Haynes, Greenwich principal, in a telephone interview about Greenwich's “2011 United Kingdom Investment Management Study.”
Corporate and public plans are “confronted with similar challenges, but often the real big difference is their long-term schemes. Corporate plans are trying to get out of the game” by transferring liability to a third party in a buyout or transferring funds into a defined contribution structure, Mr. Haynes said. U.K. public plans, however, are barred by law from closing their defined benefit plans and must search for ways to improve funding, he added.
Rallying market returns had helped increase the funding ratio for U.K. corporate schemes to 84%, based on the interviews conducted from March to May 2011, before the increased volatility in the second half of 2011. That's compared to 80% last year. Nearly 10% of the corporate plans surveyed intend on offering incentives to participants in the next two to three years to encourage moving assets into defined contribution structures.
In the last year, corporate plan executives reduced allocations to domestic equities to 13.6% of total assets from 15.8% in 2010; while passive fixed income increased to 15.2% from 11.8%, hedge funds to 3.1% from 2.5%, and “other” asset categories including LDI strategies to 11.1% from 8.5%.
Another important growing trend that Mr. Haynes sees in corporate plans is the move to fiduciary management. Nearly one in 10 U.K. corporate schemes now employs an outside provider for delegated services like fiduciary management.
However, among U.K. public plans, 54% intend to make significant changes to asset allocations between now and 2014. Of those, 23% expect to make significant additions to active international equity allocations, with about the same amount planning to reduce domestic stock allocations.
Only 18% of corporate schemes are open to new employees, 28% of corporate plans have been frozen. Half of the corporate plans surveyed now use an investment consultant that specifically advises corporate CFOs about pension issues.
The findings come from interviews with 359 executives at the largest pension funds in the United Kingdom.
