UK - Schemes can improve returns by buying stocks of companies which have large pension fund deficits, fund managers claim.
They say companies such as British Airways, GKN and Rolls Royce – which have seen their share prices hit severely due to their large scheme deficits – have been penalised too heavily.
They say these stocks were unfairly downgraded because investors mistakenly added scheme deficits to corporate debt totals. As a result, many stocks have been undervalued and fund managers are encouraging schemes to buy them and cash in on their recovery.
Gartmore Investment Management UK fund manager Sacha Sadan said: “The fear was so great that people said ‘I’m not going to own this stock because it’s going to go bust’.
“A lot of people got carried away on the downside. But if you think the market is going to get better, the way to play that is to play the ones being pushed on the downside.”
Tilney Investment Management director Peter Bickley agreed and said the rally in equity markets would provide a boost to company balance sheets as the gains would help plug scheme deficits.
“People used to buy life companies at the bottom on the basis that they are ‘a geared play’ on the equity market going up,” he explained.
“There’s an argument that if the BA pension scheme is worth five times the company, it too is ‘a geared play’ on prices going up.
“The feeling is that people are not going to go bust because of pension fund deficits – the scare had become grossly overdone.
“If you get a combination of modest further progress from equities and significant backing up in bond yields, then the whole funding thing looks less scary.”
But Newton Investment Management UK equities director Clive Beagles disagreed.
He said these were “bombed out” shares and the reason they fell so hard was due to fears about trading performance, not scheme deficits.
A number of pension schemes have been prompted to lock in gains with a move into bonds after the estimated deficit across FTSE 100 DB pension schemes improved by £36bn, over the 12 months ending 30 June last year, JLT Employment Benefits found.
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