On the go: Underfunded defined benefit schemes in the UK will require “once-in-a-century” equity performance if they are to avoid carrying their funding gaps well into the 2030s, according to a new report from Willis Towers Watson.
The report argued that, considering current funding levels and typical asset allocations, the average underfunded scheme will require equities to reach 9 per cent above cash rates each year for the rest of this decade if they are to close their funding gaps by 2030.
The research, compiled using data from the PPF7800 index, suggested that the 9 per cent figure is almost three times the historic average of 3.1 per cent since records began, making these schemes overdependent on historically improbable returns.
The picture improves when international comparisons are thrown in, the report continued, with data from US equities showing average 10-year returns amount to a superior, but still insufficient, 6.2 per cent a year relative to cash.
Nine per cent returns have only been achieved by US equities in little more than a quarter (27 per cent) of rolling 10-year periods since 1946, the research showed.
Commenting on the research, Katie Sims, head of multi-asset growth solutions at Willis Towers Watson, said: “Simply putting all your eggs in one basket and hoping for unlikely events will not be enough to solve the funding gap.
“Pension schemes need to look outside of listed equities and adopt the mindset of an endowment investor, embracing a broad range of assets, including private markets, to improve their return profile.
“While caution is partly understandable, year on year this problem gets worse as returns will, on average, disappoint. Allocations that have such a low chance of delivering the right outcomes might also be seen as a form of denial. Trustees need to reimagine allocations,” Ms Sims continued.
“Many pension schemes and other institutional investors need to rethink massively how they anticipate creating the necessary long-term wealth to fund their future obligations. A much greater portion of portfolios need to be invested in practical real-world projects that are actively building the economy of the future.
Listed equity certainly has a place in the investment mix, but schemes need to think beyond traditional allocations in order to meet the returns they need.”
