Corporate Engagement on Pension Funding can Revive Markets

A revival of UK Stock Markets as a whole can be given a major boost by greater corporate engagement with legacy pension schemes.  Many are international groups not listed in London.  Pension liabilities are primarily UK and can be matched by UK based investments.  

There is far greater flexibility in pension laws and regulation than actuarial practice suggests.  What is needed is for companies and the sector to have prompts to take action.  If stockbroker research raised some questions of Chairs and CEO as well as CFO, and asset managers where more involved on the subject, there could be rapid change in mindset.

There is a trigger.  Corporates’ statements on ESG are unsustainably distanced from the “get rid ASAP” position of their pension schemes plans structured into trustees Statements of Investment Principles.
Boards need to engage with the trustees and be supported by Government and investors to say they want to run the scheme on long term as an ESG Flagship in all stakeholders’ interests.  This is in preference to a sale to a life insurer.
The consequences of the engagement process are:

• Trustees set new +/- 10 year investment strategies to run on at a stable return target.
• Trustees may ask for third party, bank or insurer back up that the scheme will be or remain self-sufficient in 10 years’ time.
• Sponsors can set targets for the scheme to be fully self-funding (including costs) and to pay in due course current employees pension costs.  This can have material benefits to corporate performance.
• Investment portfolio can factor in growing Impact / Place-Based allocations as funding improves.
• Members can expect discretionary payments.

Research analysts and institutional investors have been far too passive.  A consequence has been what started as sensible derisking strategies has been over applied.  The Risk Transfer Industry – combining actuaries and life insurers – has been allowed remarkable latitude.  Greater Boardroom and HM Treasury engagement can provide the required corrective.  With fewer sellers and long-term money being directed to (C)DC pensions and with trustee and Board aligned there can be much better prospects for market.

The pension funding overhang is removed:  An expectation of more money being behind pensions for current employees raises the hopes of return seeking asset managers.  The mindset is not managing decline, but of expecting growth.