Wednesday, October 7, 2015 Stamford, CT USA — U.K. pension funds are searching for answers to a mounting underfunding problem, and asset management firms are stepping up to help. The 2015 Greenwich Leaders in U.K. Investment Management Service Quality are demonstrating how investment managers can distinguish themselves from competitors by going beyond product provision and supplying corporate and local authority pension funds with counsel and broader solutions.
Baillie Gifford, Insight Investment and Majedie Asset Management, the 2015 Greenwich Leaders, have one thing in common: They have all made client service a top organizational priority and used their best-in-class service capabilities to help clients address their strategic issues.
“At a time when pension funds are struggling to achieve the most fundamental goal of funding future obligations to their members, asset management client service can go far beyond providing a positive working experience for the institutions that purchase their products,” says Greenwich Associates consultant Lydia Vitalis. “The Greenwich Leaders are employing a new, higher level of advisory service that is providing real value to these institutions and deepening the firms’ client relationships.”
Funding Pressures
A new report, U.K. Institutions Seek Counsel and Broad Solutions from Asset Managers, from Greenwich Associates reveals both corporate and local authority plan sponsors remain hungry for new solutions to the serious problems facing their DB schemes. It is not news that longer term many U.K. companies are determined to exit the DB pension business entirely. About 80% of large companies have already closed their DB pension funds to new employees or plan to do so in the next two years. The share of large corporate DB pension funds closed to future accruals has climbed to 41% in 2015 from just 31% in 2012.
Corporate plan sponsors are also taking aggressive steps within their portfolios to isolate themselves from funding risk associated with their DB plans. As much as 20% of corporate pension assets are now devoted to liability driven investment strategies (LDI), both pooled and segregated.
“We expect allocations to LDI strategies to increase regardless of interest rate movements,” says Lydia Vitalis. “Plan sponsors have been waiting for an uptick in rates to make LDI implementation more affordable, but after five years many funds—at the urging of their consultants in many cases—are planning to move forward even if rates don’t budge.”
About one quarter of corporate pensions expect to “significantly” increase allocations to pooled LDI funds in the next three years.
Local authorities share corporate plans’ funding problems, but mostly lack the ability to close plans to future accruals and even to new employees. Average funding ratios for local authority pension plans held steady from 2014–2015, but did so at an already problematic 75%. With little hope of stepped-up cash contributions from hard-pressed municipalities, local authority pension funds are relying on market returns to close those funding gaps.
Although equity allocations are on the decline, equities still represent 56% of total local authority pension assets, compared to roughly one-quarter of total assets among corporates. Local authority funds allocate 6% of total assets to alternatives and 4% to multi-asset funds, which are being adopted by growing numbers of U.K. pension funds as a growth asset.