The pension scheme landscape in the UK - and the role of pension fund trustees - is changing dramatically, but this isn't just a theme for 2021: it will run for much longer. We believe this will drive further demand for fiduciary management services. In this outlook, we talk about what's likely to happen over the next few years, provide some forecasts for 2021, and discuss some of Kempen's plans for the year ahead.
Pension funds are maturing, so a new investment mindset is needed
Defined Benefit pension funds in particular are facing a major medium-term challenge: their memberships are maturing very quickly. In the past, these schemes had large net cash inflows, but they are now paying out an increasing amount of cash as more and more members retire and contributions dry up. This means they're turning cashflow-negative - paying out more cash than they receive. This requires a huge change in their investment mindset.
An additional concern is that the likelihood of receiving the cash that has been promised by sponsors is falling as companies struggle in an uncertain economic environment. This has been exacerbated by coronavirus: recovery contributions need to be paid by sponsors, but if the company goes bankrupt there's no way they can make those payments. A lot of pension schemes are now in a position in which their sponsors are struggling to make the cash payments they have committed to. Regulatory guidance at the beginning of 2020 encouraged sponsors and trustees to agree shorter deficit plans, but the financial impact of the pandemic means that these are more likely to be pushed further out.
These changes mean pension funds need to adopt a very different investment mindset from the one that has dominated over the past decade, when they have invested in return-seeking assets on one hand and hedging assets on the other. Now that pension schemes are having to pay out more cash, building a diverse set of cash-generating, income-producing assets in their portfolio has become more important than ever.
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