DB schemes pursuing riskier investments, TPR warns

The watchdog’s conclusion is based on data collected in its ‘DB pension scheme leverage and liquidity survey’, published yesterday, which covered 137 of the UK’s largest 400 DB pension schemes, with assets worth £697bn.

TPR stated that there has recently been a significant increase in the number of schemes developing strategies based on matching pension scheme cash flows.

Although the development of these strategies is not wholly unexpected, particularly as schemes are becoming increasingly cash flow negative as they mature, these strategies have been developing within a relatively benign investment environment where interest rates are close to historic lows and credit conditions have generally been accommodative, it added.

Fred Berry, TPR’s head of investment consultancy, said: “In a low-yield environment, the search for yield has led to some schemes seeking riskier and more illiquid investments to earn their targeted returns.

“We believe that some of these strategies introduce additional risks that may not be adequately rewarded, and which may amplify market impacts in the event of adverse shocks,” he said.

“We also believe that some of the longer-term illiquid investments may not adequately allow for the risks that climate change may introduce.”

The survey, which will help inform the Bank of England’s Financial Stability Report, also shows that “many schemes are well diversified and are actively monitoring the risks in their portfolios that may arise in relation to leverage and liquidity”, Mr Berry noted.

He added: “However, we believe that some of the survey data shows a potential for concentrations of risk within individual schemes. We will be considering further how best to address those issues across the wider pensions landscape.

“We will analyse the survey responses in more detail and consider how we can use the findings to help trustees to improve their risk management practices further.”