Caterpillar Pension Plan has postponed a decision to cut its equity exposure to increase its liability-driven investment allocation as a result of concerns over stock market volatility.
Equity markets have become increasingly erratic over the past month, with volatility in the S&P Europe 350 tripling since September, leaving schemes wondering how to reduce the impact on their funding level.
We were on the verge of moving 10 per cent of equities out but there was extreme volatility over a two-week period, so we postponed the decision and have left the equities in place for now
Jane Wilson, Caterpillar
Jane Wilson, UK pensions manager at the heavy machinery manufacturer, said the scheme was close to hitting its next derisking trigger in September – a 92 per cent funding level – which would have seen it switch 10 per cent of assets from equities into LDI.
“We were on the verge of moving 10 per cent of equities out but there was extreme volatility over a two-week period, so we postponed the decision and have left the equities in place for now,” Wilson said. “We are reviewing and will make a decision as to how to proceed during the next month.”
The £1.1bn scheme (source: NAPF yearbook 2014)hit its first derisking trigger in December last year and at the time held 67 per cent of its assets in actively managed equities across six managers.
It removed one of these managers and moved 2 percentage points from the others into a swing portfolio used to fund its LDI strategy.
It hit its next trigger at 88 per cent funded and cut its equity exposure by a further 10 percentage points.
As reported in June, the scheme then held 50 per cent of its assets in active equities and 17.5 per cent in its LDI portfolio.
It planned at that point to close to future accrual from December 2019 and trustees would then decide whether the scheme should have any equity holdings.
Marian Elliott, head of trustee advisory at consultancy Spence & Partners, said trustee boards should be cautioned against “any knee-jerk reactions” as a result of equity market volatility, but added it could be more expensive for schemes to derisk at present.
“It’s really important that schemes look at their own specific liabilities and understand what impact risks have had on their funding position, how that is relative to where they thought they were going to be in any funding plan they had and whether moves need to be made as a result,” said Elliott.
“There will be some [schemes] that were less protected against movements in equity markets, where these shifts have really affected their funding position and where the employer feels it’s not affordable to lock into that,” she said.
Dan Mikulskis, co-head of asset and liability modelling at consultancy Redington, said it is feasible that some schemes’ funding ratios will have worsened by around 4 to 8 percentage points over the past three to six months.
“That will mean that schemes need a higher return from their assets to become fully funded,” he said.
