Almost all (98 per cent) defined benefit (DB) pension schemes in the UK are expected to be cashflow negative within the next 10 years, according to Mercer.

Its Investing in the future: UK DB de-risking trends report found that nearly 80 per cent of schemes are cashflow negative, with this expected to rise to just under 90 per cent in five years and to around 98 per cent in 10 years.

Most schemes were found to still be disinvesting assets to fund cashflow, but there was an increase in schemes requiring income-generating assets to distribute that income as opposed to reinvesting it.

Mercer stated that avoiding permanent losses of capital was “critical” for schemes in negative cashflow territory, and warned against selling tradeable assets such as equities and corporate debt in times of market stress.

The firm urged schemes to consider increasing allocations to income-generating assets.

The report also found that most schemes were still looking to de-risk gradually from growth assets into liability-matching assets when opportunities arose, and to increase hedge ratios opportunistically.

“This helps prepare the plan for the endgame which is, in most cases, to move to a self-sufficient position and eventually buyout benefits with an insurer,” it added.

“This is the journey plan for 44 per cent and 34 per cent of survey participants, respectively.”

Nearly half of the schemes surveyed had no formal de-risking trigger framework in place.

Mercer urged schemes to consider the benefits of such a framework to enable a more pro-active approach of journey planning and allow them to react promptly to short-lived opportunities to de-risk.

Little difference in investment strategy was found between strong and weak covenants, with those described as having a ‘weak’ or ‘tending to weak’ covenant having an average allocation of 13 per cent to equities, while those with ‘strong’ or ‘tending to strong’ covenants had an average allocation of 17 per cent to equities.

“Plans should consider a post-Covid-19 covenant review where this has not already been done, especially in those sectors that have been most adversely affected,” the report concluded.

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