BlackRock has outlined five mistakes pension schemes are making and how trustees can overcome them.
The company said pension funds are "chronically underfunded" with a collective deficit of £227billion but there are steps trustees can take to get closer to meeting their funding objectives.
The first mistake, BlackRock said, is that schemes focus too much on the micro and not the macro.
Two thirds of trustees spend five hours or less per quarter on investment matters, according to recent industry surveys, and BlackRock said scheme trustees are not using this small amount of time to best effect.
Instead, many focus on the intricacies of investment decisions, such as which securities are held or which manager to select.
BlackRock said trustees could improve their focus on the macro issues by relying more heavily on the input of their service providers (consultants, actuaries, asset managers) and delegating decisions.
The second mistake is not recalibrating investment strategies, despite changing market conditions and an increase in liabilities.
The solution, BlackRock said, is for trustees to evaluate all the options available to them, whether that be a deliberate decision to do nothing; consider different betas and exposures (e.g. smart beta, LDI) explore a greater allocation to active management; or capture the illiquidity premium, which can be well rewarded for long term investors.
Thirdly, pension schemes underestimate time horizons, even though they are in a unique position because of their long-term investment horizons and ability to tie up capital for long periods of time.
Pension schemes will gain from realising that the challenges of investing in private market assets (e.g. additional governance) can be more than offset by the attractive yields and diversification benefits on offer.
The fourth mistake is not managing the total risk profile, which means that pensions schemes have gone from almost fully funded in 2007, to approximately £227bn in deficit.
BlackRock advised schemes to evaluate interest rate risk and inflation risk in the same way they evaluate other investment risks.
Finally, BlackRock said, trustees are not evaluating advice regularly, and should rectify this by challenging the quality of advice, for example by using an independent trustee.
First published 28.04.2017
Lindsay.sharman@wilmingtonplc.com
