EUROPE - Lehman Brothers issued its European Pensions Briefing with a warning schemes should be addressing their solvency levels over the coming year.
Gareth Derbyshire, head of UK pensions coverage, said: "From 12 months ago, the economic situation has changed with many commentators believing we are heading towards recession.
"Throughout 2007 funding levels were generally rosy; in 2008 pension funds should be asking themselves how they are protected against downside risk."
Lehman Brothers continued that liability driven investments (LDI) would continue to grow in market share as bond and equity markets looked uncertain. Likewise the trend towards bulk annuity buyouts, although a substantial fall in funding levels would make buyouts unaffordable.
The investment bank's report also highlighted the need for companies to address pension fund risk management from a corporate finance perspective.
Nigel Cresswell, head of German pensions coverage, commented: "Companies need to understand the impact their pension fund's assets and liabilities have and introduce some level of risk management.
"Companies should no longer see pension debt as a cheap way of financing their company and should be funding, potentially via debt issuance and hedging liabilities instead."
The authors agreed pension funds needed to understand and be comfortable with derisking. They said it was important be proactive and have structures in place before they were needed.
In this instance both the company and the pension fund's finances would be aligned and ready to react to any trigger in the market. This would avoid the company and the pension fund simultaneously requiring financial support, with the pension fund endangering the health of the company.
The European Pensions Briefing is a six monthly publication distributed to pension funds and associated industry professionals.
This week's top stories included Cardano announcing plans to acquire Now Pensions from a Dutch pension fund later this year.
Royal Bank of Scotland (RBS) faces a £102m impact on liabilities as a result of equalising guaranteed minimum pensions (GMPs), according to its annual results.
Malcolm Mclean says getting the channels of communication right and engaging more openly is a good starting point