Trustees and pension fund executives, representing schemes with assets in excess of £90bn, voted overwhelmingly in favour of equities still playing a vital role in closed DB schemes at a recent Pension Investment Academy (PIA) debate held in London.
The findings are in stark contrast to popular current market opinion that equities are on the way out.
"We are living in unprecedented times and there is a strong argument that the current macroeconomic environment is not one which is suited to high levels of equity exposure, said Fred Jaffe, executive director at PIA. Therefore, he said, trustees should be open to "broadening their investment style and spectrum".
"Trustees are often persuaded to invest in equities because they are deemed to be a good match for scheme liabilities. However, equities are not currently delivering the big returns that many schemes need in order to address the deficit issues."
A poll taken at the beginning of the event showed that 75% of trustees disagreed with the motion that: "There is no place for equities in closed DB Schemes", 10% agreed and 15% were undecided.
Jaff said: "As was pointed out at the event, recent PPF figures show that out of the 6,432 defined benefit schemes in the PPF 7800 index there are £1.07tn of pension fund assets in the UK with total liabilities of £1.3tn. There are 5,248 schemes in deficit and 1,184 schemes in surplus. These deficits must somehow be met, which means trustees may need to step outside their comfort zone and consider a wider range of options to find higher yielding assets to meet long term liabilities. Fund managers, consultants and advisors have an important role to play in helping trustees consider the whole investment toolkit to generate the returns necessary to meet liabilities."
The event panel was made up of high profile industry figures who motioned for and against. Key arguments 'for' included the covenant being the bigger issue, equities being extremely and unnecessarily illiquid as well as tax inefficient and the fact that by always having to be solvent, pension funds can no longer be regarded as long term investors. These were dismissed by the 'against' panel who argued that not only are closed pension schemes still very much long terms investors, anything up to 30 to 40 years in some cases, but that equities remain a vital piece of trustees' toolkit and not using them would be like "throwing the baby out with the bath water".
First published 01.11.2012
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