Increasing bond yields, improved funding positions and potential concerns over availability of liquidity are driving an expectation of a bumper year for risk transfer activity in 2023.
The questions posed by the new funding regulations and DB funding code may prompt a shift from implementing a journey plan to considering how to utilise surplus and whether risk transfer is appropriate to a scheme’s particular circumstances .
With bond yields rising over February and approaching levels of that seen following the events at the end of September 2022, the funding position of the FTSE 350 pension funds on an accounting basis continues to improve with increased surplus’, according to Mercer’s Pensions Risk Survey data analysis for February 2023.
As Mercer Principal, Matt Smith noted that the continued rise in funding levels will only increase the focus of many pension schemes and sponsors on risk transfer, but the real question should be whether other alternatives might add more value in high yield environments.
“Trustees and sponsors are finding that with the current improved funding position they are reaching the end of their journey plan much sooner than expected and in many cases are defaulting towards a risk transfer solution” said Mr Smith. “The current market environment provides a great opportunity to revisit journey plans, consider adjustments to funding and investment strategies, but also consider whether risk transfer is the only option available. Risk transfer options, consolidators, DB master trusts, captives as well as other risk management techniques may also be attractive options in a high yield environment, depending on the circumstances of the scheme. It shouldn’t be one size fits all. Defaulting towards risk transfer presents a risk that other potential value adding pathways will be missed.”
Mr Smith added, “For those schemes targeting a risk transfer transaction in the near future, it is likely that the current market environment and strong funding positions will continue to provide opportunities for those who are ready to take them. The importance of having a robust plan in place, as well as clean data and understood benefits is higher than ever – but this is also true if alternative options are being considered. Regardless of an individual scheme’s end game it is important not to forget that data is key and should be the primary focus”.
Mercer’s Pensions Risk Survey data analysis for February 2023 shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £47bn at the end of February 2023. The present value of liabilities fell from £622bn at 31 January 2023 to £589bn at the end of February 2023 driven by a rise in corporate bond yields, offset to an extent by a rise in future implied inflation expectations. Asset values also fell to a lesser extent over the period to £636bn compared to £655bn at the end of January 2023.
Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by the Pensions Regulator and elsewhere tells a similar story.
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