The deficit problems of defined benefit schemes in smaller companies are getting overshadowed by the deficits of large blue-chip companies, say consultants.
Aon Hewitt and Law, Clark and Peacock LLC (LCP) released scheme deficit analyses of FTSE 350 and FTSE 100 companies and estimated shortfalls at £38 billion and £19 billion respectively.
However, the above estimates reveal little about the true state of affairs in the vast majority of small and medium pension schemes, said head of investment at Bluefin, Eamonn O’Connor.
“It is a shame so much attention and innovation is focused on the elite schemes with smaller schemes marginalised in the battle for market share of the largest funds”, he said.
Smaller pension schemes often face typical problems such as limited investment options, funding level volatility from member movements, less sophisticated investment options and governance structures higher administration and compliance costs along with concentrated mortality risks, said O’Connor.
Smaller schemes often have less sophisticated investment options, agreed Phil Page, client manager at Cardano.
“Typically, larger schemes are much more aware of the ability to hedge liability risks… and they often have better diversified portfolios,” Page said.
Peter Dean, investment consultant at Bluefin said schemes that have managed risks better will be able to avoid the 10-15% drop in funding ratio.
“For example, investments in diversified growth funds have held up well in comparison to pure equity funds over the last month. This is another wake up call for trustees to become more pro-active in managing their strategic asset allocation and to embrace a risk management approach, Dean said.
“The big companies are the ones people recognise and there are some common threads – deficits had gone down, the RPI to CPI switch, and not enough people saving enough for retirement,” said LCP senior partner Bob Scott.