Pension schemes should focus on funding levels, not yields, for trigger strategies, says Goldman Sachs Asset Management


I was not alone in thinking pension schemes had rising bond yields to thank for the boost to defined benefit pension scheme funding levels at the start of 2014.

Three quarters of the few who managed to dodge tube strikes for an early morning briefing with Goldman Sachs Asset Management (GSAM) had the same conviction.

But the asset manger’s research concluded that pension funds’ gain over 2013 - from 93% to 103% on an accounting basis - was largely driven by investment returns. The data, which looked at the schemes of FTSE 350 firms, shows changes to discount rates contributed to a 5.6% improvement in overall funding levels, dwarfed by the 9.5% boost from investments.

Interestingly, Mercer figures measured an increase in the overall deficit of the FTSE 350 during 2013.

The report explains that looking at headline bond rates can be misleading. The yield on 10-year UK gilts rose 137bps but investment-grade corporate bond yield ticked up just 36bps, supressing discount rates.

Yield-based triggers fail to protect funding levels and aren’t flexible enough

All of which begs the question - should schemes lock in the gains they’ve made and sell out of equities, or maintain their exposure to growth assets and bank on another good 12 months? According to GSAM’s report, most schemes are still light on fixed income assets considering their funding position, that is, they are over-exposed to risky growth assets. This dislocation was particularly pronounced in sub-£500m funds.


The report suggests this lag could be caused by the dominance of liability-driven investment (LDI) mandates based on yields. GSAM suggests “designing a journey plan with de-risking triggers based on the funding level, as these are more outcome orientated”.

The report’s authors, Scott McDermott, Kathryn Koch and Carolyn Tavares, add that yield-based triggers fail to protect funding levels and aren’t flexible enough to take advantage of opportunities from re-risking portfolios.

Whether or not schemes have the conviction (or the desire) to reform their LDI strategies remains to be seen.