Three quarters of trustees are rethinking their DB endgame planning on the back of strong funding progress according to the Pensions Management Insititute.
Its annual UK Fiduciary Management Survey, published with Schroders Solutions found 76 per cent of trustees now thought it was necessary to revisit their journey planning now the DB endgame is in sight.
Funding has improved significantly since the lows of March 2020, buoyed by strong growth markets and falls in liability values. For example, the PPF7800 Index saw funding levels improve by 13 per cent through this period to the end of 2021.
The research shows two-thirds of participants (66 per cent) said that schemes will need to consider options other than buyout as their long-term funding goal, despite buyouts becoming more affordable and expectations of a record year for transactions.
A majority of participants (70 per cent) believe they should reassess their engagement model as they get closer to their endgame. This is a call-to-action to investment consultants and fiduciary managers to ensure their endgame strategies, solutions, and service meet the needs of pension schemes for the final leg of their journey.
As part of journey planning, illiquid assets have been a growing part of pension scheme investment strategies as trustees seek assets that provide a smoother funding journey and help meet increasing cash-flow demands. Most participants (56 per cent) favour using illiquid assets as they approach their endgame. For schemes targeting low dependency, illiquid assets can form a long-term key strategic component.
In the last few years, ESG and climate risk have risen to prominence on the trustee agenda. Two-thirds of those surveyed (67 per cent) also believe trustees should be setting “climate milestones” to frame how their investment strategy is expected to evolve with the implementation of strategies that achieve ESG goals.
This highlights the fiduciary importance of this topic and a collective desire to act quickly. The research found almost half of respondents (49 per cent) believe schemes should divest from managers with low ESG and climate scores. This compares to 26 per cent of respondents who oppose divestment.
Schroders Solutions head of fiduciary management business development Ronan O’Riordan says: “Many of the issues we identified over the past 12 months, were again key focuses for trustees looking ahead, with sustainability, illiquid assets and long-term funding at the top of the agenda.
“Today’s 2022 survey findings will not only help trustees plan and prioritise but it will also help Schroders Solutions understand how best to work with them to develop solutions and services that match their changing needs.”
The PMI chief executive officer Gareth Tancred adds: “Our research shows that many trustees can now rethink their journey plans after a bumper year in investment performance and scheme funding. While some will be looking to secure buy-outs in the coming months, other trustees are looking at self-sufficiency as a long-term goal. The research also highlights the growing appeal of illiquid assets to helping trustees to smooth their funding journey.”
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