22 November 2006
Playing it too safe with pension fund investments could make
trustees and actuaries open targets for negligence claims, says
City law firm Reynolds Porter Chamberlain LLP.
Since the stock market crash of 2001/2002 a number of claims
have been launched against pension trustees and their advisers who
had taken high risk bets on the equity markets. However, Reynolds
Porter Chamberlain (RPC) is now saying that an investment strategy
that is more conservative than the norm but still leaves a fund in
deficit could also attract claims from disgruntled fund
holders.
The poor performance of equities in 2001/2002 led to an increase
in the use of liability driven investment (LDIs) strategies whereby
entire portfolios were shifted into 'safe' gilts or a mixture of
gilts and corporate bonds. The boom in LDI's followed Boots' high
profile decision in 2001 to adopt a gilts-matching policy and all
its pension fund assets were moved.
Simon Goldring, Partner, of RPC, says that that strategy, unless
reviewed carefully, could be storing up problems for the future: "A
low yielding gilts strategy could lock in a fund's deficit, whereas
a more balanced gilt/equity investment has a better long term
chance of capital growth. Not only that, but an extremely cautious
strategy does not even mean a deficit will necessarily be capped if
there are unexpected changes in mortality rates and salary
inflation.
"The other problem is that many schemes have switched to gilts,
pushing up prices. Yields have fallen, weakening the attraction of
these investments. Meanwhile equities have increased in value since
March 2003.
"If equity markets continue to perform well and gilts do not
improve the environment becomes more fertile for negligence claims
caused by an under-exposure to equity investments."
