In recent years there has been a sharp uptick in the number of UK DB pension scheme trustees implementing fiduciary arrangements. Indeed, this is not a coincidence given the current investment environment trustees are facing.
The ‘lost decade' Over the past 10 years interest rates have fallen significantly: this has resulted in a fall in the discount rate which is used to value pension scheme liabilities, which means that these liabilities have grown. For pension schemes that have not managed their liability risk, asset growth has simply not kept up, resulting in significant pensions deficits appearing on company balance sheets. The chart shown below tracks the funding level of the average UK pension scheme.1
While the chart clearly shows that the funding levels have been volatile over the past decade, they have now settled back to roughly where they started. It is what the Pension Protection Fund has rightly called a ‘lost decade' for pensions. This comes despite substantial payments from sponsoring employers. Trustees fundamentally have two main levers when it comes to filling their pensions deficits: sponsor contributions and investment returns. Against this background of continuing uncertainty in markets and increasing demands on pension assets, schemes need to think differently about how to achieve investment returns and fill their deficits. This had led many trustees to reassess their investment governance models, and explore fiduciary management.
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