FTSE 350 companies are on the hook to underwrite an additional £100 billion ($155.2 billion) of investment risk within their pension funds, said a new report by Lincoln Pensions.
In its FTSE 350 Pension Report, the firm examined the extent and distribution of defined benefit fund risk within FTSE 350 companies.
Lincoln Pensions found an aggregate pension fund deficit in FTSE 350 companies of £72.4 billion. However, on top of that “a 1-in-20-year downside financial event” — which Darren Redmayne, managing director and head of Lincoln Pensions, described as events such as the collapse of Lehman Brothers, the bursting of the dot-com bubble, and the first Gulf War — would push this deficit up to £169.5 billion.
Lincoln Pensions applied an estimate of investment risk to the aggregate deficit figures, using the 1-in-20-year measure of investment volatility. This means these employers are underwriting almost £100 billion of investment risk in their DB pension funds. The number of FTSE 350 companies with pension fund deficits also increased under the value-at-risk model, up to 212, from 172 that are now reporting deficits.
“We have got to look at the deficit in the context of the value of the business that supports it,” said Matthew Harrison, managing director at Lincoln Pensions, at a briefing Monday.
The report also found the average share of a pension fund’s assets invested in riskier, return-seeking assets — including equities and hedge funds — was just more than 44%. Those pension funds with a higher allocation to riskier assets were found to be more dependent on their sponsoring employers for support in underwriting the funding shortfall relative to the strength of their employer covenant, than those that were less reliant.
That is “effectively doubling up,” said Mr. Redmayne at the same briefing. “This concept of trying to invest your way out of trouble was not what we expected to see.”
Rather, Lincoln Pensions would have expected pension funds whose deficit represents a larger proportion of the enterprise value of their sponsoring employer, taking less risk in their asset allocation.
