Despite the improved funding positions, more than one in three (35 per cent) DB schemes have yet to finalise their endgame objective, according to the latest industry survey from Russell Investments.
Its third biannual report, found the of the schemes that had decided on a long-term target, buyout remains the most popular option — cited by almost four out of 10 (38 per cent) of these schemes. Run-off or low dependency strategies were also being considered by 21 per cent of schemes that had set a long-term endgame objective.
The report – UK Defined Benefit Market Insights Study – found just 5 per cent of schemes have changed this target in light of funding improvements over the past year, with much more focus being on the timeframe to reach it.
A total of one in three (30 per cent)of pension schemes are working towards endgame within a shorter timeframe but are seeing more challenges in their ability to adjust asset allocations and access buyout solutions.
The research also found that almost a quarter of schemes now expect to reach endgame on a one to three year view.
As a result, de-risking towards endgame has increased significantly in importance for pension schemes over the last twelve months, with more than half (56 per cent) of respondents identifying this as an investment priority. This is an 11 per ent increase on a similar survey undertaken in this period last year.
Improving or maintaining funding levels (56 per cent) and managing market risk (53 per cent) remain key priorities. An increased number of schemes also identify the importance of reducing pressure on their sponsors (30 per cent) and addressing leverage and collateral issues (27 per cent).
Larger schemes with more than £1 billion of assets appear more focused on leverage and collateral (37 per cent ), as well as on increasing liquidity (31 per cent) and improving diversification (29 per cent) than their smaller peers.
Pension scheme decision-makers also identify a number of potential challenges ahead with a fifth of survey respondents highlighting the ability to access buyout providers as a major cause for concern.
The report also found that concerns over inflation and central bank policies have receded significantly over the last six months.
For the first time in this research series, a minority (48 per cent) of respondents identify this as a key concern, a fall of 26 per cent compared to twelve months ago. Concerns over recession have also fallen notably, declining by 29 per cent over the last twelve months. Just one-quarter of respondents now identify this as a key concern, suggesting a greater sense of optimism towards the UK economy.
While investment priorities remain largely consistent, a higher proportion of larger schemes (with more than £1bn of assets) identify improving or maintaining funding levels, de-risking towards endgame, and managing market risk (as key focuses. In contrast, a higher proportion of smaller schemes identify cashflow generation and increasing levels of return as investment priorities.
Decision-makers expect to decrease exposure to property (30 per cent), developed market equities (20 per cent) and private equity (16 per cent) over the next six months, whilst allocations to government bonds (35 per cent) and investment grade credit (31 per cent) are anticipated to increase over the same period.
However, respondents highlighted potential concerns about their ability to reduce exposure to illiquid assets, noting the significant demands being placed on secondary markets.
While improving ESG remains a key consideration for half of all schemes, their decision-makers are increasingly cognisant of the difficulties they face in taking meaningful action on environmental issues. Just over a quarter (26 per cent) of respondents indicate that they are ‘unlikely’ or ‘very unlikely’ to increase their focus on climate change in the next twelve months, compared to just 7 per cent this time last year. This potentially suggests climate change has become a lower priority in the context of other focuses for some schemes.
Russell Investments head of UK fiduciary management Simon Partridge says: “DB schemes are having to rapidly accelerate their efforts and planning as significant improvements to funding levels over the last twelve months put many much closer to endgame than they would have previously anticipated.
“This does, however, bring challenges, with legitimate questions being raised over the capacity of providers to satisfy the increased demand for buyout solutions. Competition will be at a premium and schemes seeking to go down the buyout route will need to work in conjunction with their advisers over the coming months to satisfy the requirements of insurers.”
Partridge adds: “While positions for DB schemes have undoubtedly improved over the last twelve months, it has in parallel created a new set of complex challenges for decision-makers.
“As the pensions landscape continues to shift significantly, outsourcing will have a critical role to play in helping schemes navigate operational, asset allocation and regulatory considerations that will all need to be addressed if schemes are to meet their long-term goals.”
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