The ‘Navigating the key issues facing schemes’ survey found that almost two-thirds (64%) of respondents have benefited from increased funding levels over the last 12 months, with 35% experiencing a rise of over 5%,
As a response to funding changes, 83% of schemes are defining an end-game strategy, with a 53/47 split between buyout and low dependency. The size of the scheme strongly influences this decision; larger schemes (over £500m) favoured low dependency whilst those under £500m favoured buyout.
Meanwhile, a noteworthy 78% of respondents are adjusting their return requirements, with the vast majority now looking to reduce their targets. The shift to a higher interest rate environment has created a surplus for some schemes, with 1 in 5 considering returning this to the employer.
Of the respondents looking to make asset allocation shifts over the next 12 months, some 38% were targeting increased corporate bond allocations and 29% greater LDI exposures. Some 38% and 40% of investors were looking to reduce their equity and illiquid allocations respectively. This trend is more pronounced among those targeting a buyout outcome.
Furthermore, almost half the schemes surveyed (49%) said liquidity needs will be an increasingly important priority in decision-making during 2024.
Ronan O’Riordan, Head of UK Business Development, Institutional, at Schroders, said: “These results indicate that schemes will likely continue moving towards lower-risk, lower-return seeking portfolios. Allocations to fixed income could offer schemes several benefits including providing predictable income streams, stabilising returns and offering lower volatility compared with equities. Fixed income can also be structured to deliver regular cashflows which can be aligned to liquidity demands, further enhancing their suitability for these schemes.
“The shift towards LDI and this emphasis on liquidity could also indicate a trend towards reducing leverage and increasing collateral coverage. This would improve schemes’ liquidity and resilience to market shocks, a key lesson from the 2022 gilts crisis. This suggests schemes are either learning from past experiences or simply adhering to regulatory guidance.”
Tim Middleton, Director of Policy and External Affairs at the PMI comments: “This survey provides a very clear assessment of the UK’s Defined Benefit sector in 2024. The most prominent picture is of the number of schemes which have become very mature and which also have sufficient funding to consider the most appropriate endgame solution. For mature DB schemes, this is seen through the reported attraction to corporate bonds and a corresponding reduction in exposure to equities. Trustees clearly see liquidity as important in their schemes’ stage of the glide path and this is reflected in reduced exposure to illiquid assets.
“It is also interesting to note how trustees’ thinking concerning endgame solutions has evolved in recent years. Until very recently, bulk annuitisation was seen as the only viable option. While 45% of the surveyed schemes are considering this, 40% are considering the alternative of run-off. Many smaller schemes may also be considering the new option of DB consolidation.”
The PMI’s Fiduciary Management (“FM”) Strategic Forum was created in 2021 as a partnership between Schroders Solutions and the PMI. This group represents many of the third-party evaluation firms involved in the FM market, along with senior independent trustees. Its focus is on discussing the key issues affecting pension schemes across all governance models and sizes and its findings have informed the topics of this year’s survey.
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