David Blake, a keynote speaker at the marcus evans UK Pensions & Investments Summit 2010, shares his strategies on eliminating deficits within UK pension funds.

Interview with: David Blake, Professor & Director of the Pensions Institute, Cass Business School

 London, UK, July 15, 2010 –

Pension funds need to start looking towards Target-Driven Return strategies, states David Blake, Professor of Pension Economics and Director of the Pensions Institute at Cass Business School. In the mature UK pensions industry, having good returns some years and poor returns other years is no longer an option. A keynote speaker at the marcus evans UK Pensions & Investments Summit 2010, taking place in London, 18 – 20 October, Blake discusses Target-Driven Return strategies, diversifying portfolio risks without sacrificing returns, and the exciting longevity swap market in the UK.

What are some of the challenges facing the pensions industry in the UK at the moment, and what solutions would you recommend?

David Blake: The size of deficits in pension funds and longevity risks are the two main challenges at the moment. Deficits need to be minimised now and completely eliminated in the near future as they are retracting resources from company investment programmes and shareholder dividends. Many pension schemes are closing themselves to new members, and in about a dozen years, we will see the end of the final-salary scheme in the UK which took 150 years to build up. Many feel that closing it, is the only way to deal with deficit issues, but they are simply capping their risks, and their exposure to risks. They are still going to have to minimise and eliminate deficits somehow; they cannot walk away from pension obligations.

Many funds are selling off their obligations to new insurance companies, which buy out liabilities and manage the risks themselves. But some funds are keeping assets as well as liabilities in their own books, and managing them through different types of swap arrangements, interest-rate swaps, inflation swaps and now longevity swaps. The development of the longevity swap market in the UK is very exciting for the pensions industry.

What is the most effective way of closing pension fund deficits?

David Blake: Pension fund sponsors are going to have to put in the necessary resources, there is no way around that. Traditionally, if the employer did not wish to contribute much, he would ask the trustees to consider a more aggressive (i.e. risk-taking) investment strategy in the hope that in time, the higher returns would close the deficit. They would have a 30 – 40 year period to carry this out. However, regulators have now limited this to 10 years, making it far riskier to adopt an aggressive investment approach as a way out of the hole.

As pension funds mature and meeting payments to pensioners becomes their prime concern, Chief Investment Officers ought to pursue more bond-type investments and invest less in equities, in order to generate more reliable cash flows. Taking on risks is no longer a realistic strategy in today’s investment environment. Capping risks and removing them is now the name of the game.

What long-term investment and asset allocation strategies would you recommend?

David Blake: What we need to start looking towards is Target-Driven Return strategies, such as Diversified Growth and Absolute Return. Diversified Growth puts together a large range of asset classes, including alternatives, private equity, hedge funds and commodities, thus helping diversify the portfolio risks without sacrificing returns. Absolute Return tries to deliver a target return above inflation.

What is your outlook on the UK pensions industry?

David Blake: The National Employment Savings Trust (NEST) is coming in 2012. The high rates of tax relief on pension contributions made by highly paid taxpayers will also end, because of government budget deficits. This could be the final nail in the coffin for good private-sector pension schemes. One of the main reasons why company pension schemes have been such a success in the UK is the generous tax relief on the contributions made by company directors. If this is no longer available to directors, why are they going to bother running pension schemes for their employees? Most employees in the private sector could end up in NEST!

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About the UK Pensions & Investments Summit 2010

This unique forum will take place at the Wyndham Grand London Chelsea Harbour Hotel, London, UK, 18 – 20 October 2010. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The Summit includes presentations on reducing the pensions deficit, adopting optimal asset allocation strategies, and exploring new investment horizons.

For more information please send an email to info@marcusevanscy.com or visit the event website at http://www.ukpensions-summit.com/DavidBlakeInterview

Please note that the summit is a closed business event and the number of participants strictly limited.

About marcus evans Summits

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