Many of the recovery plans drafted by underfunded pension schemes are “a fantasy”, according to Dawid Konotey-Ahulu, a partner at investment consultants Redington.
Speaking at an investment conference hosted by Aviva Investors in London recently, he said: “There is the idea that by 2020 the pension scheme will have achieved self-sufficiency and when you look under the bonnet you see that there is no chance of that happening.”
Pension funds, he added, needed to understand the way they allocated their assets and the risks they were buying.
“There are a lot of things that can and should be done – like not putting all your money in equities – and a day of reckoning is coming for those pension schemes that do not get it right.”
Mr Konotey-Ahulu went on to say that the investment consulting industry had displayed a poor understanding of the risks faced by pension funds and done a “feeble” job of predicting the impact of the financial crisis as it had played out over the last nine months.
He said: “One thing I think consultants have recognised is that they need to get up the curve very quickly in the area of risk. For instance, do you rely solely on one measure of risk, or do you look to other measures like stress-testing. Consultants have also realised that they need to understand how capital markets work. Capital markets are extremely complex, as we found out.”
He contended that a “herd instinct” among consultants, asset managers and investment bankers meant that what one practitioner did, others followed.
Niall Paul, chief investment officer, equities, at Aviva Investors, claimed that conventional equity mandates were based almost entirely on benchmark-relative growth funds that paid no heed to the liabilities of the pension fund.
He said: “Being a slave to a benchmark has created a generation of active fund managers who are closet indexers and we have seen the results in terms of active value-added for pension funds. So allowing the active managers more freedom to express themselves could protect portfolio returns in bad times.”
Professor Andrew Clare, chair of asset management at Cass Business School and a member of the trustee board of the GEC Marconi Pension Plan, advised schemes to “hedge those risks that are not going to be paid for in the long-term and understand those risks that have to be paid for”.
He added: “More frequent monitoring of your positions will give a better understanding of what is going on. Looking at your portfolio once every two years will not do.”
