More than half (55%) of defined benefit (DB) schemes are now cashflow negative, yet many do not have formal de-risking plans, according to research.
The figure is up 13 percentage points from last year, while almost all (85%) of the remaining 45% of schemes will also be cashflow negative by 2027. Just over two in five (43%) of these schemes will go down the same route within five years.
Mercer's 15th European Asset Allocation Report, published on 5 June, also revealed almost nine in ten (88%) of schemes adopt a disinvestment approach to match cashflow negative outgoings, while 29% have investment mandates to distribute income. Just 4% use income and principal receipts.
Despite the increasing maturity of these schemes, just 37% had formal de-risking triggers in place, the report also found. Just over two-thirds delegated de-risking, with 87% of those delegating to a third party.
Global director of strategic research Phil Edwards said schemes should not be complacent on the back of recent stock market performance.
"Being cashflow negative is a natural life stage of a mature DB pension scheme, of course, but recent stock market performance may have lulled some into a false sense of security," he said. "Our report highlights that less than 40% of schemes have a formal de-risking journey mapped out. This leaves a large body of schemes with no clear plan in place."
Edwards added schemes need to ensure they have enough liquid assets to meet cashflow and collateral requirements, while avoiding crystallising any losses.
"We would encourage all schemes - large and small - to use scenario planning and stress-test analysis to understand how a market correction might impact their financial health."
Since 2008, asset allocations to UK equities has halved from 58% to 29%, the report also found, with many report participants stating they expect to see this continue into the future. The figure fell by two percentage points over the last year.
Some of this has shifted into alternatives, with 22% now in the asset class compared to 21% last year. There has been a 4.8% increase in allocation to hedge funds, and a 4% increase to real assets. However, multi-asset funds saw a fall of 2.3%, and private equity allocations dropped 1.5%.
Meanwhile, allocation to bonds rose from 48% to 49% since the 2016 report.
Edwards added schemes were increasingly moving towards riskier but greater return-giving asset classes.
"There is a growing consensus that portfolios dominated by equities, credit and government bonds will offer a relatively unattractive risk/return trade-off in the future," he said. "While hedge funds have faced a challenging post-crisis environment, with falling volatility reducing the potential for generating alpha, institutional investors have, in the main, retained their allocations in recognition of the valuable role they can play in portfolios."
The report also found one in five asset owners integrate environmental, social and governance (ESG) risks into their beliefs and policies, with 28% citing the financial materiality as the key driver. One in five of these added it was down to reputational risk.
However, just one in 20 schemes consider the potential risk to investments posed by climate change, up from 4% last year.
Aviva Life & Pensions has concluded an £875m buy-in with its own staff pension scheme, following on from a similar transaction last year.
Just Group has completed a £74m pensioner buy-in with the UK pension scheme of a US-listed engineering business.
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.
The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.