Amsterdam / London – 25 February 2025

Van Lanschot Kempen has modelled the impact of five potential risk scenarios relevant to UK DB pension schemes, assessing the impact of each risk on the funding and deficit levels of schemes per £500 million of liabilities.

• Well-funded UK DB pension schemes’ funding levels may fall by 4% with deficits increasing by around £19 million, per £500 million of liabilities, if the ‘Magnificent Seven’ technology bubble bursts this year.

• Similarly, a potential Eurozone sovereign debt crisis may result in funding levels for well-funded UK DB pension schemes falling by 4% and deficits increasing by £24 million, per £500 million of liabilities.

• Amidst growing ‘stagflation’ concerns in the UK, modelling shows that well-funded UK DB pension schemes would experience a 4% fall in funding levels, with deficits increasing by £13 million, per £500 million of liabilities.

• However, this scenario may prove beneficial for medium and lower funded schemes, with funding levels projected to increase by 3% and 5% respectively in the same scenario, with deficits predicted to fall by £32 million and £65 million respectively, per £500 million of liabilities.

A sudden and significant decline in the stock prices of the seven largest technology companies, referred to as the ‘Magnificent Seven’, may lead to well-funded UK DB pension schemes’ funding levels falling by 7% and deficits increasing by £19 million per £500 million of liabilities, according to research from Van Lanschot Kempen Investment Management (see Figure 1 & 2 below).

A sharp downturn could lead to substantial market volatility, eroding investor confidence and potentially triggering broader economic repercussions. This includes impacting other risk-on assets which would result in lower market liquidity and a flight to quality assets. In this event, the analysis shows that lower funded schemes, often exposed to riskier assets, would be hardest hit, experiencing a fall in funding levels by an estimated 11%, with deficits increasing by £61 million per £500 million of liabilities.

Alastair Greenlees, Head of Investment Strategy UK at Van Lanschot Kempen commented: “UK DB pension schemes have benefitted from rising gilt yields over the past few years that have left many sitting pretty in surplus. However, our research has shown that schemes must remain vigilant to the significant tail risk events that continue to pose a potential threat in the market. This is particularly important for the UK DB sector, where strong funding levels could easily be undermined by unexpected external risks, especially as many schemes begin to consider their strategic endgame options.”

The research also forecasts a decrease in well-funded UK DB pension schemes’ funding levels by 4%, with deficits also increasing in the potential event that a member country of the Eurozone is unable to meet its debt obligations and defaults on its sovereign debt.

A debt crisis could trigger a fall in interest rates as well as wider corporate credit defaults, both in the Eurozone and globally. This could lead to investors rushing to safe-haven assets which would drive down yields on UK gilts thereby increasing the present value of pension liabilities. A flight to safety would also hit risky assets hard, impacting medium and lower-funded schemes to a marked greater extent with deficits increasing by £56 million and 85 million respectively, per £500 million of liabilities.

Closer to home – a look at the UK
The latest UK growth figures make for a gloomy read, with the Bank of England recently halving its growth forecast to 0.75% for this year. Adding to this, concerns around rising unemployment and inflation have led to growing fears of UK stagflation.

Crucially, the analysis shows a divergence in the impact on schemes in the event of UK stagflation. For well-funded schemes, funding levels could fall by 4%, due to widening of corporate credit spreads which would negatively impact bondholders and impact such schemes that typically hold these assets to a greater extent within 'low risk' portfolios. Comparatively, for medium and lower funded UK DB pension schemes, rising gilt yields are expected to lead to an increase in funding levels by 3% and 5% respectively, with deficits falling by £32 million and £65 million per £500 million of liabilities.

In the UK, much has also been made around the government’s reforms that are imminently expected for the DB sector, with a particular focus on how to increase investment in ‘productive UK assets’ in addition to the mechanisms behind potentially extracting surpluses. However, the analysis shows that even in an extreme scenario, whereby UK DB schemes may be mandated to invest up to 10% of their assets in productive UK assets, funding and deficit levels are unlikely to be impacted significantly (see Figure 1 &2 below).

The Trump Factor
The re-election of Donald Trump for his second term as President has left many in the industry looking to the impact on UK DB pension schemes. At the very forefront, is how his plans for hefty tariffs may impact global markets and potentially stoke ensuing reinflationary concerns.

Well-funded schemes could see a slight uptick in their funding status, with deficits falling by £20 million per £500 million of liabilities. Critical to consider is that most DB pension schemes cap pension increases between 2.5% and 5% per year and as such, this risk may potentially create a mismatch for a Liability-Driven Investment (LDI) strategy; should inflation hit or surpass 5%, schemes holding index-linked gilts may find themselves in the unique position of having to balance the benefits of high inflation against the risks of over-hedging and mismatched strategies.

Alternatively, in the event that a Trump Presidency proves to be a boon for economic growth and global markets, the research shows that all schemes would benefit, with lower funded schemes benefiting to the greatest degree due to their higher allocation to riskier assets).

Calum Edgar, Investment Strategist at Van Lanschot Kempen, commented: “The analysis underscores the importance of considering individual scheme situations and tailoring risk management approaches accordingly. In a period during which we are seeing the UK pensions industry undergo significant change, trustees must be armed with bespoke solutions designed to meet the needs and circumstances specific to their schemes in order to ensure resilience against adverse events while maintaining a path for their members’ long-term security."