Smaller U.K. pension funds sustained almost five times the declines in funding levels as larger funds in 2016, research by Goldman Sachs Asset Management shows.
The firm's annual review of defined benefit funds of FTSE 350 companies found pension funds with less than £500 million ($644 million) in assets recorded an average 6.6-percentage-point decline in their funding levels. That compares to funds with more than £500 million in assets, which saw an average decline of 1.4 percentage points. Funding level details were not available.
GSAM said 47% of FTSE 350 company pension funds have less than £500 million, compared with 85% of all U.K. corporate funds.
The average decline across the FTSE 350 was 1.5 percentage points, with the funded level hovering around 100%. GSAM said this was a reasonable outcome given 2016's "momentous events … and their effect on investment markets."
The review identified three main drivers of funding level changes over the year. The more than 1% fall in U.K. long-dated government bond yields, primarily in the latter half of 2016, "had a profound impact on the value of pension scheme liabilities," and raised the aggregate liability value of FTSE 350 pension funds. However, that was partially offset by strong global equity market returns.
Weakness in the pound sterling also benefited pension funds with unhedged investments. "This potential one-off windfall acted as a much-needed boost for many schemes," said the review.
GSAM also outlined challenges trustees are likely to face in the coming years, including generating returns as the economic cycle matures and volatility potentially picks up, and adjusting governance to optimize portfolios to meet cash flow requirements.