Half (50%) of all DB pension scheme trustees have a clear endgame strategy in place according to research from Standard Life, part of Phoenix Group. However, trustees anticipate challenges to delivering it with market volatility cited as the key concern by 40%.
Standard Life surveyed 50 DB pension scheme trustees of schemes larger than £100m, exploring their concerns and considerations around their approach to de-risking. The results reveal that many trustees, regardless of whether they have a formal endgame strategy in place or not, cite a series of key barriers which may hinder their ability to pursue their plans to fully secure member benefits. In addition to market volatility, investment strategy (36%) was cited as the second biggest barrier, and lack of engagement from sponsors (32%) as the third biggest barrier.
Key barriers to pursuing their end-game strategy for UK DB pension scheme trustees:
1. Market volatility (40%)
2. Issues with their investment strategy (36%)
3. Lack of sponsor engagement (32%)
4. The new DB funding code (26%)
5. General preparedness a potential buy-in or buy-out (26%)
6. Attracting insurer interest (20%)
7. Issues with data (18%)
Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance, at Standard Life, comments: “While improvements to funding levels have been very much welcomed, trustees are still facing key barriers when it comes pursuing and executing their ultimate end-game strategies. External factors such as the potential for a fall in gilt yields, present a risk to schemes that are not well-hedged, as do challenges around any illiquid asset holdings the scheme might have. Trustees do, however appear to be reacting to this challenge, with 40% of trustees saying the recent changes in the market environment have prompted them to reduce their scheme’s allocation to illiquid assets as a priority.
Among other key barriers cited by trustees includes the Pension Regulator and Department for Work and Pensions’ new DB funding code, which outlines how pension schemes should de-risk and allocate investments towards low-dependency funding by the time of ‘significant maturity’, for a quarter (26%) of trustees.
Kunal Sood added: “In practice, most schemes are likely to be complying with the principles set out in the code already, and with the minimum requirement for sponsors to be maintaining full funding for significantly mature schemes, it is possible that sponsor engagement improves and reduces that barrier for trustees.”
General preparedness for a potential buy-in or buy-out deal was also noted (26%), while 20% said attracting insurer interest was a key concern. 18% mentioned issues with data to be the biggest barrier – a key component to ensuring a smooth de-risking process.
Kunal Sood concluded: “Bulk purchase annuities are widely considered to be the gold standard when it comes to de-risking, and our research reveals that four fifths of pension scheme trustees do expect to approach an insurer about a buy-in or buy-out in the next five years. With no signs of the market slowing down, schemes should remain focused on preparation and solid data, which continue to play a vital role in ensuring a smooth and efficient de-risking journey.
“There should also be a greater emphasis on finding and choosing the right partner that supports schemes’ long-term objectives, especially as many trustees report concerns over a lack of engagement from sponsors and consider it a barrier to pursing their endgame strategy. We are not aware of any schemes that haven’t obtained a bulk annuity quotation, and we believe there is sufficient appetite in the bulk annuity market to service all those schemes that desire insurance. For our part, we are ready to engage with DB scheme trustees to help meet their overarching endgame strategies and secure member benefits.”
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