The de-risking phenomenon is drying up long-term investment in younger generations as companies are forced to put more into defined benefit (DB) schemes, according to Ashok Gupta.
The Pensions and Lifetime Savings Association's (PLSA) DB Taskforce chair (pictured) said as employers put money into DB schemes rather than companies, this creates an inter-generational transfer of wealth to baby boomers from their children and grandchildren.
He believes this is partly the result of schemes moving to gilts as they de-risk, which crystallises deficits and just increases the amount sponsoring employers have to put in with yields being as low as they are.
He added: "There's a fundamental long-term issue. Around 80% of the developed world's long-term investment comes from pension funds and life companies. If all pension funds and life companies de-risk then the supply of long-term investment dries up which is not good for future economies and younger generations."
Speaking at the PLSA's Defining the Future of DB conference on 7 July, Gupta said he was alarmed by the reduction in investment risk.
He pointed out p16 of the Pension Protection Fund Purple Book, which shows in just under a decade investment in equities has halved from 60% to 30% of total assets while investment in bonds has increased from 30% to 50%, which is particularly concerning if low rates persist.
He questioned whether the focus on deficit volatility drove the right outcomes for pension schemes. Companies are faced with Hobson's choice - put money into their businesses to create jobs, grow the business and strengthen the convent, or increase deficit contributions, he said.
There are also problems with the herd mentality of DB schemes, short-termism and potential pro-cyclicality. Gupta thinks schemes should take a more independent investment approach rather than follow the herd.
The PLSA launched the taskforce in March to tackle the problems faced by DB schemes, and explore capital allocation, risk to members' benefits and intergenerational equity.
In addition, Gupta hoped solutions would be found by exploring three main topics. These include: efficiency such as the day-to-day running of a scheme; capital allocation such as that between the business and funding of pension promises; and benefits including intergenerational differences and whether risks are fully appreciated.
"It's not enough to get backing of Department for Work and Pensions (DWP) for example but the backing of all of parliament with any decisions the DB Taskforce finds, since DB pensions are so politically sensitive," said Gupta.
"We want to explore what regulatory change we should argue for, whether we are focusing too much on deficits and if this is driving short-termism, and are companies equipped to explain to shareholders the true impact of their DB schemes?"
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