Richard Dowell looks at how some pension schemes may be repeating past mistakes.

Albert Einstein once said "Insanity...is doing the same thing over and over again and expecting different results."

This quote struck me whilst preparing for a conference this week.

The topic was about fiduciary management, but instead I wanted to speak about the wider issue of pension fund investing.

Why?

Well when you look at what has happened in the UK defined benefit pension industry, deficits have increased by GBP 700 billion over the past eight years despite sponsors having tens of billions of additional contributions (PPF 7800).

Investment risk is a major problem

Funding has come under strain as a result of the amount of investment risk being taken. This risk has unfortunately led to some severe performance issues.

Since mid-2008 there have been four periods which has seen severe falls in the funding ratio of the 'average' UK scheme (ranging from 10% to 25%). Having such big falls means that it is hard to recover, and many haven't.

The same things, the same results

The biggest factor for many has been the large exposures to interest rates and inflation. Since the financial crisis, liabilities have markedly increased as market interest rates have continued to fall. The assets haven't kept pace and deficits have significantly increased.

The large weighting towards equities is also a big exposure which led to a rocky ride, with allocations still very significant in most portfolios.

This isn't a new issue – it has been well commented on in the past. However, the same views are being expressed in portfolios as they have been for many years.

The pensions industry is expecting economic growth to surprise on the upside – equity markets to continually rise and interest rates to rise faster than the market is currently expecting (and inflation to fall faster too).

This an expectation the industry has had for many years, yet history tells us that this isn't always the case.

Surely this will be the case?

How confident are we that this will be the case?

What happens if we fall back into another recession (not out of the question and a certainty at some point)?

How should we be investing portfolios against this possibility?

Do we understand the impact on funding ratios, and the potential impact on members, the sponsor and their contributions?

All questions trustees should be considering when thinking about when they manage the pension fund investments.

Let's break the cycle

There is much that can be done to help, but it requires thinking differently.

Much is discussed in the pensions press about using more investment tools – these can help, but it is how they are used that matters most.

How they are used is dependent on the philosophy and process – whether it's yours or the team you work with.

Fiduciary management was the topic of the presentation and how you can use it to manage risk.

Using a fiduciary management approach should give you access to a fulltime team and often a wider range of tools – but is this enough?

And that's the point. It is the underlying approach to pension fund management that is important, not the label given to it.

For your sanity, it's time to do something different.

Written by Richard Dowell, Head of Clients, Cardano