As we enter 2016, a common challenge lies ahead for both defined contribution (DC) and defined benefit (DB) savers – meeting liabilities. Comment by Arno Kitts, Head of UK Institutional at BlackRock.
“Since the Pension Protection Fund (PPF) was set up 10 years ago funding ratios have worsened and over the course of 2015, the circa 5% of asset growth was easily outpaced by the circa 10% growth in liabilities. On the surface, a key reason for this is positive – people are living longer. However, this presents an ongoing challenge for schemes. “Additionally, the cost of meeting liabilities has increased, causing a greater focus on risk management – schemes need to have the right systems and tools to help them understand how the assets they hold move relative to their liabilities.
“2016 will continue to see volatility and low returns and we anticipate experiencing more frequent episodes of heightened volatility, variable correlations and intermittent liquidity. In this environment, conventional portfolios could disappoint and we expect to see schemes continue to diversify, particularly into alternatives where they can reap the rewards of illiquidity premia. Alternative assets such as private market income, infrastructure debt and renewable energy, can provide an illiquidity premium of 1 – 3% – not insignificant in today’s low return environment. These additional returns reward a long term approach, where pension funds have an advantage over other investors, and could benefit in the year ahead.”
Tony Stenning, Head of UK Retail at BlackRock, adds:“A DC plan is in essence a DB plan, but for an individual. The challenge facing individuals and pension trustees is the same – the ability to meet liabilities over the long term. “Pension freedoms have offered more choice for people at retirement, but this now means they need to consider how long they will live for, whether they are saving enough in order to generate their desired income, and if their money will last as long it needs to. Our Investor Pulse survey shows the majority of Brits underestimate their life expectancy, and 44% are concerned they will outlive their savings.
“The key challenge therefore, is to help people to understand their liabilities. We launched CoRI to the UK market in 2015 to address this exact challenge, CoRI enables those in their pre-retirement years to quickly calculate how much they need to save in order to generate a specific annual retirement income.”
