The 2021/22 edition of Aon’s Global Pension Risk Survey – published every two years for over a decade - charts the actions, plans and concerns of UK DB pension schemes. This year’s survey had a total of 137 UK responses, covering schemes of all different sizes, from the small (15 percent of respondents ‘ schemes had fewer than 500 members) to the very large (30 percent of respondents’ schemes had over 10,000 members).
As found in the 2019 survey, more than three-quarters of schemes are either targeting buyout or self-sufficiency. But for the first time in the history of the survey, buyout (47 percent) has surpassed self-sufficiency (34 percent) as the most common long-term objective.
Matthew Arends, partner and head of UK Retirement Policy at Aon, said: “The COVID-19 pandemic created challenges for schemes and their sponsors, with many choosing to reassess the risks they faced. However, since the initial market reaction, pension scheme funding levels have recovered and many schemes are in a better place than at the start of 2020. As schemes have seen improvements in funding positions, lower-risk targets now seem more achievable. In a trend tracked over the last eight years, this survey has seen the number of schemes targeting buyout more than doubling, to a point where now it has become the single leading long-term target for UK DB pension schemes.
“We expect that the remaining 8 percent of schemes which are without a long-term target will have to develop one in the near future, driven by both the Pension Schemes Act 2021 and the current consultation by the Pensions Regulator on a new Code of Practice for funding. As regulation on commercial consolidators is also progressing, in the future we expect to see some schemes formally looking to move to a consolidator as their long-term target.”
Matthew Arends continued: “The survey results also reveal that 65 percent of pension schemes expect to reach their long-term target within 10 years, with the average timescale falling from 9.4 years in 2019 to 8.8 years in 2021. This continues the trend seen in recent Global Pension Risk Surveys and is a particularly notable reduction given the disruption caused by the COVID-19 pandemic and the general increasing strength of long-term targets.”
Getting to the endgame
This year’s survey again asked pension schemes how they expected to reach their targets. The most common response was to rely at least partially on asset performance (63 percent). Over half of schemes (54 percent) expected to be able to reach their long-term target simply by sticking to their agreed funding plan, showing that their long-term target is already consistent with their technical provisions.
Member options exercises are also still planned by over a quarter of schemes, while 24 percent of respondents were anticipating that additional contributions, beyond the agreed recovery plan, would be an element of the actions needed to reach their long-term aim. This is down from 46 percent of respondents in the 2019 survey.
Alastair McIntosh, partner at Aon, said: “While buyout is now the preferred endgame for schemes, it is not without complications. What this year’s data clearly shows is that before the end of the 2020s, the average pension scheme will have reached its long-term target. Inevitably, this will put pressure on an already busy insurance market.
“However, this should not be a cause for concern. We have seen how resilient the bulk annuity market has been in the past five years, with annual transaction volumes more than tripling. We expect there to be a further increase in demand in the very near future, which will almost certainly see more occasions where insurers are selective about which schemes to engage with. Even so, with a carefully considered strategy and good planning in place, schemes will still be able to access attractive pricing and terms.”
Alastair McIntosh continued: “Market capacity restrictions also exist in other parts of the process. While two-thirds of schemes are planning member option exercises in the next 12-24 months and over one in four envisage offering paid independent financial adviser (IFA) support, there is a limited number of available advisers. Schemes have a duty of care to members and it is reasonable to expect that demand for IFA advice will rise as schemes progress to their endgame.
“Whether schemes are targeting buyout or running on as their long-term target, it will be crucial for schemes to focus on an overall strategy to remain resilient and to navigate new forms of volatility. This stretches beyond the more traditional investment and funding risks and can incorporate projects such as longevity, data cleansing, liability management, cyber risk and GMP equalisation. What is clear from the survey, is that with just 40 percent of schemes having a cyber response plan and only 33 percent in the process of implementing GMP equalisation, many schemes have a lot of work to do before approaching their long-term target.”
For more information, Aon’s Global Pension Risk Survey 2021/22 is available here.
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