Wednesday, October 12, 2016 Stamford, CT USA — U.K. pension sponsors are bracing for the possibility of big increases in required cash contributions to defined benefit pension schemes.
As companies and local authorities wrestle with these daunting problems, a handful of U.K. asset managers are standing out from the crowd by providing plan sponsors with exceptional service that helps them find solutions. At the top of this short list are Baillie Gifford and Majedie Asset Management, the 2016 Greenwich Quality Leaders in U.K. Institutional Investment Management Service.
Even before the U.K.’s historic decision to leave the European Union, one third of the country’s DB plan sponsors said they anticipated having to rely on cash contributions as their primary means of reaching funding targets. That share was up from 28% of plan sponsors planning to rely on cash contributions—as opposed to investment returns—as their primary funding tool in 2015. At the start of 2016, average funding levels for corporate DB schemes stood at 92% and local authorities were funded at an average 77%. However, nearly half of U.K. corporate funds said they were experiencing negative cash flows or expected to be in the next three years. One quarter of local authority funds said they expected outgoes to exceed contributions in that period.
“From the prospective of these plan sponsors, the Brexit vote made a difficult situation much worse,” says Greenwich Associates consultant Mark Buckley. “Plunging yields after the referendum and the subsequent rate cuts and quantitative easing program by the Bank of England have depressed funding levels already under strain.”
Seeking Alpha, Pensions Shift Assets to Specialist Managers and Strategies
DB pension schemes’ problems have become so acute that plan sponsors know they will need a combination of large cash contributions and strong investment returns to sustain their plans. (This is especially true among local authorities, who realize that taxpayer-funded contribution increases will be nearly impossible to achieve in the foreseeable future.)
Reflecting their need for robust portfolio returns, both corporate funds and local authorities have increased their expectations for the amount of alpha their asset managers will deliver. Driving these increases is a shift in portfolio allocations toward specialist strategies and asset classes in which managers are seen as having a better chance to deliver outperformance. Looking ahead, plan sponsors’ search for specialist alpha providers will increase demand for a range of products including multi-asset funds, unconstrained mandates and alternative asset classes including private equity, infrastructure and real estate.
Greenwich Leaders
At a time when the local authority pension industry is being restructured from the ground up and companies are worrying about the long-term sustainability of their own DB plans, asset managers have a unique opportunity to strengthen their client relationships by helping plan sponsors tackle these historic problems.
The 2016 Greenwich Quality Leaders in U.K. Asset Management demonstrate that such assistance can take the form of high-level strategic advisory services addressing a client’s overall portfolio or more granular assistance with a particular market segment or asset class.
“In this regard, Baillie Gifford and Majedie Asset Management both demonstrate a fastidious focus on client service that enables them to leverage internal intellectual capital into insightful and value-added conversations and materials,” says Mark Buckley.