XPS’ Head of Investment Ben Gold reviews pension scheme funding levels and highlights potential scenarios for 6 to 12 months ahead

“Over the first quarter of 2020 we’ve seen the funding level of a typical scheme plummet by an unprecedented 8.4%. Even though most asset prices have fallen considerably, with so much uncertainty over the impact of COVID-19 on society and the global economy, our outlook on most asset classes is unfavourable.

Schemes need to understand what could happen from here and plan for different scenarios that could play out over the next 6-12 months and the results are sobering.

The best case is that schemes broadly recover the losses seen over the last quarter, but we think this pretty unlikely in so short a time period. Our central case is for a further deterioration in funding levels from here of some 5%. But we think there is a chance that things will get a lot worse than this, with funding levels falling by a further 25% or more. This would be devastating for pension schemes and their sponsors at a time when many businesses are struggling to survive. So in our view it is vital that trustees right now ensure their schemes are protected against the worse outcomes we could see.”