Pension funds increasing stress testing, Ortec research finds
06 October 2022 UK
Image: fotofabrika
93 per cent of UK pension fund managers are increasing their stress testing budgets and anticipate a rise in industry spending over the next three years, according to business management consultant Ortec Finance (Ortec). Major risks being considered are inflation and climate change.
Only 47 per cent of those surveyed believed that pension schemes are prepared to deliver yield while being fully-funded or buy-out ready, with 23 per cent saying that preparations are ‘okay’ and 27 per cent stating that they are poorly prepared.
27 per cent predict a significant increase in stress testing and scenario modelling budgets. This uptick in spending is in part due to more sophisticated investment strategies, which 97 per cent said had freed up more time for stress testing.
Considering inflation, 47 per cent expect a ‘dramatic increase’ and 53 per cent a ‘slight increase’ over the next year. In light of this, half responded that their scheme is very well-hedged and only 3 per cent believed that their scheme is less than ‘quite’ well-hedged.
77 per cent plan to increase their investment in climate-focused funds in the next two years, and 63 per cent will increase their allocations to green bonds. 90 per cent said that they would increase their allocation to investment grade fixed income, the most in-demand asset class, according to Ortec.
Deon Dreyer, managing director of Ortec UK, says: “The risks funds are facing are increasing, with inflation and climate change identified as the biggest challenges to schemes trying to deliver yield so they can remain fully-funded or be buyout ready.
“Pension funds need to manage their balance sheet effectively in order to achieve long-term objectives while dealing with short-term risks. That includes identifying major risk sources as well as looking at future pensions, contributions, and funding levels.”
Only 47 per cent of those surveyed believed that pension schemes are prepared to deliver yield while being fully-funded or buy-out ready, with 23 per cent saying that preparations are ‘okay’ and 27 per cent stating that they are poorly prepared.
27 per cent predict a significant increase in stress testing and scenario modelling budgets. This uptick in spending is in part due to more sophisticated investment strategies, which 97 per cent said had freed up more time for stress testing.
Considering inflation, 47 per cent expect a ‘dramatic increase’ and 53 per cent a ‘slight increase’ over the next year. In light of this, half responded that their scheme is very well-hedged and only 3 per cent believed that their scheme is less than ‘quite’ well-hedged.
77 per cent plan to increase their investment in climate-focused funds in the next two years, and 63 per cent will increase their allocations to green bonds. 90 per cent said that they would increase their allocation to investment grade fixed income, the most in-demand asset class, according to Ortec.
Deon Dreyer, managing director of Ortec UK, says: “The risks funds are facing are increasing, with inflation and climate change identified as the biggest challenges to schemes trying to deliver yield so they can remain fully-funded or be buyout ready.
“Pension funds need to manage their balance sheet effectively in order to achieve long-term objectives while dealing with short-term risks. That includes identifying major risk sources as well as looking at future pensions, contributions, and funding levels.”
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