• Recession experiences have varied in terms of trigger events and associated market responses. With the U.S. economy firmly in late cycle, and the risks of a global recession rising, we consider a plausible range of downturn scenarios and the degree to which UK defined benefit (DB) corporate pension funds may be resilient to them.
  • While UK corporate plans have mitigated some market risk by lowering allocations to growth assets, other risks have become more important – notably, cash flow, liquidity and operational risks.
  • Covenant risk remains the most critical risk for sponsors today, amid concern that mature pension funds themselves, given their size relative to sponsors’ balance sheets, may have the propensity to drag their sponsors under or materially impact their ability to recover from hard times.
  • A “corporate caution” scenario, characterized by severe equity downturns, falling government bond yields and high default rates, would be the most challenging for UK DB pension funds, particularly those in a negative cash flow position.
  • Our Long-Term Capital Market Assumptions (LTCMAs) are structurally optimistic, but the end of the current cycle may come with short-term pain. We can’t predict how the next recession will unfold. But, we can provide a framework to help UK pension funds prepare for the late-cycle risks most relevant to their investment needs and objectives.

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