Editorial: Derisked out of pocket
The trend away from equities is inevitable for many schemes, making it a matter of when, not if, they increase their bond holdings to reduce risk and cover a maturing membership.
But the consistent urging of pension schemes to derisk, and the consensus that has built up around it, skates over the problems that can be caused by timing this move badly.
Those schemes that sold out of equities at or near the bottom of market must wince when they see global equity markets flirt with historic highs, having locked into poor-value assets at the worst possible time.
Illustration by Ben Jennings
It is too much to demand of scheme investors that they make stellar returns from calling the market. But surely there has to be some analysis of market conditions and whether the noble intention to derisk fits the economic reality.
And schemes are admitting that the desire to liability-match should be attenuated by the necessity of asset growth to make up funding deficits.
The London Pensions Fund Authority’s decision to dump its gilt holdings reflect an acknowledgement that UK government paper, depressed by quantitative easing and demand, is not going to help it close its funding gap.
As its chair Edmund Truell told the FT in March: "We are in a position where we do not have enough assets to meet our liabilities. If our rate of return [on gilts] is 3 per cent before inflation, probably nothing after inflation, we are not going to be able to pay the pensions."
Indeed, such feelings are also fuelling the rise of alternative forms of fixed income, as are concerns at the impact of a medium-term rise in interest rates.
Insight's Steve Waddington arguesthat strong equity performance will not deter those that have sold traditional equity funds to invest in diversified growth funds with that old mantra of equity-like returns with lower volatility
How often we have heard that phrase over the past few years. The key will be how ‘like’ equities returns can be if we see a period of further growth.
The cult of the equity may be over, but the cults of the DGF and of derisking are going strong. I wonder what the consensus is missing.
Ian Smith is editor of Pensions Expert. You can follow him on Twitter @iankmsmith and the team @pensions_expert.