Smaller FTSE 350 defined benefit (DB) schemes were nearly 15 percentage points less well-funded than larger schemes in 2017, according to a Goldman Sachs Asset Management (GSAM) analysis.
The firm analysed the difference between funding levels of schemes with under £100m of assets and funding levels of schemes with over £5bn of assets, finding aggregate positions of just under 90% and just over 100% on an IAS 19 basis respectively.
The asset manager's fifth annual review of all FTSE 350 DB schemes - which looks at the 2017 accounts of FTSE 350 companies - found many smaller schemes were hindered by growing liability values through the year.
The firm further noted that smaller schemes experienced significantly higher funding volatility in 2017 due to a "less robust approach" to risk management than their larger counterparts, according to the report.
The observations are concerning given the shape of the UK pensions landscape, GSAM said, with some 45% of FTSE 350 schemes below £500m in size, compared with 87% of all UK schemes.
Despite the large gap between small and large schemes, most saw improved funding positions over 2017, ending the year in the best funding position they have been in for a long time. According to GSAM, this was thanks to flat bond yields, stabilising liability values, and strong growth asset returns, and trustees should now focus on "capturing and securing these beneficial outcomes".
Head of UK and Irish institutional business David Curtis said the volatility of funding positions experienced by smaller schemes highlights that larger schemes better implement risk management strategies.
However, he expected access to these strategies for smaller schemes to grow: "These strategies are made available to smaller pension schemes through the adoption of fiduciary management and we expect the increasing prevalence of fiduciary management to enhance scheme governance."
Schemes across the 350 firms are becoming increasingly cashflow negative, the report also found, with 90% of schemes holding this status, compared to 60% in 2012.
Global portfolio solutions group head for Europe, the Middle East, and Africa, and Asia-Pacific, Shoqat Bunglawala, said schemes are likely to face increasing investment volatility, particularly as the UK continues to navigate its exit from the European Union.
"UK schemes in particular will be faced with their own challenges including the outcome of Brexit, potentially increasing interest rates and a volatile currency. In this environment, we think an enhanced focus on risk mitigation and a dynamic approach to asset allocation will prove invaluable."
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