While the aggregate surplus for FTSE350 schemes continues to improve, the pension funds are not investing their assets in productive finance, according to analysis from Mercer.
The consultancy’s monthly analysis of FTSE350 pension schemes showed an aggregate surplus of £66bn (€77.3bn). The aggregate funding level was 111% at the end of March, increasing from 110% at the end of February.
With the defined benefit (DB) schemes being currently well-funded, the UK government has turned its attention to encouraging them to invest in UK growth through so-called productive assets.
However, Adam Lane, head of corporate investment consulting at Mercer, worries that many UK pension schemes will not be rushing to invest in such assets as they continue to de-risk.
The government is currently consulting on measures to encourage DB schemes to “invest for surplus” in productive asset types, but Lane said whether this will work as intended “is to be seen”.
He said: “Pension schemes, like all investors, need compelling investment opportunities and for those opportunities to meet their requirements.
“The nature of DB schemes means that risky, illiquid or non-competitive UK assets will not fit the bill unless they are adequately compensated.”
The government’s ongoing consultation on Options for DB Schemes looks at measures that might expand risk appetites, but it does not encourage investment in UK productive assets specifically. Lane said the government would need to go further to achieve its aim to change the behaviour of UK pension funds.
Lane added that without further measures “we do not see DB assets supporting UK growth in the way the government intends”.
“Instead, over the next five years, we see UK asset exposure reducing as schemes dispose of their Gilt portfolios to finance buyout deals with insurers,” he said.
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