How to invest your way out of a deficit

Hewitt risks raising expectations too high

Hewitt risks raising expectations too high

Most days I can rely on a communication from some investment consultant or other landing in my inbox bemoaning something about pensions.

Today it is Hewitt Associates, which quotes some nice round figures about the danger of 15,000 people in the UK losing at least 20 per cent of their pension benefits if trustees of defined benefit schemes do not “take control of investment strategy”. It says £150m of pension benefits are at risk over the next two years.

Hewitt reckons there are about 75 schemes that can’t look to employer contributions to plug the deficit gap. They will either have to wind up, resulting in the sponsor going bust, or find a sure fire investment strategy that will boost assets. If the schemes enter the Pension Protection Fund, 15,000 members could lost around £10,000 each, Hewitt estimates. Hence the £150m at risk.

Trustees need to reduce deficits “with an investment strategy which mitigates uncontrolled risk while driving consistent returns”.

They are relying too much on volatile equities apparently. According to Hewitt:

A combination of clearly defined strategic goals, an implemented risk mitigation programme and real time market decision-taking focused on the strategic goals can deliver the necessary long-term investment performance with greater reliability.

Presumably none of the 75 schemes in question are clients of Hewitt, otherwise they would already be reaping the benefits of this rather vague-sounding approach.

If the consultant has come up with the magic formula to cure all deficit problems, it is not just defined benefit schemes that will want to take advantage – we could all do with a “winning investment strategy”.

But Hewitt should be wary of raising expectations too high. If consultants had got it right in the past, perhaps pension schemes would not be in such a mess now.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.