The research focused on a range of transformational events in the pensions industry over the course of 2022, as the industry was impacted by multiple factors including the autumn gilts liquidity crisis, the Russia-Ukraine war and the energy and cost-of-living crisis. The report also considered its impact on schemes in several areas, including their governance, liquidity, and endgame strategy.
Looking at the end game, the material increases in interest rates over 2022 have implicitly reduced the cost of insuring pension scheme liabilities with a third-party insurer, i.e., buy-in or buyout. For many schemes, their timeframe to buyout reduced significantly despite market volatility in 2022. However, the anticipated demand for buy-ins and buyouts is expected to exceed insurer capacity in 2023 recognised by some 28% of respondents who see insurer capacity constraints as the major hurdle for achieving a buyout.
Almost a third (30%) meanwhile saw GMP Equalisation as the major hurdle and 27% saw data quality as the key obstacle. In terms of steps that respondents plan on taking to improve operational resilience as a result of the gilt crisis, 48% said that they would be reviewing the operational aspects of their investment strategy such as dealing frequencies and settlement periods.
The research also highlighted the growing importance of ESG in trustees’ investment strategy. Two-thirds (64%) felt they knew enough about ESG and climate risks to make informed decisions on investment strategy and for ongoing oversight. However, 58% of respondents said that they remained heavily reliant on their investment advisors and / or investment managers to stay on top of regulatory guidance and to ensure ESG compliance. This was even more pronounced for schemes with less than £1bn in assets at 76%. This is leading to some boards establishing ESG sub-committees to ensure a dedicated focus on this area.
Additionally, schemes are increasingly seeking to enhance their governance model through greater adoption of professional trustees, fiduciary managers, and third-party evaluators. All respondents to the survey reported using at least one of these services, with 31% delegating to a fiduciary manager. Based on the survey results, it is estimated that over 270 UK pension schemes could move from traditional advisory to fiduciary management in 2023. 28% of respondents meanwhile were using a third-party evaluator in some way. The research shows an increase in the number of respondents who see value in using a third-party evaluator to oversee a fiduciary manager rising from 27% of respondents in 2022 to 42% in 2023.
Ronan O’Riordan, Head of UK Institutional Business Development, Schroders, said: “For many trustees, the pensions landscape has become increasingly complex, either because of regulatory changes, growing ESG requirements or the challenging investment landscape.
“The work of the PMI’s Fiduciary Management (FM) Strategic Forum is very valuable in allowing for the exchange of ideas and perspectives across a broad range of market participants helping us to be better informed to the benefit of our clients. The research released today is the culmination of these discussions for wider benefit.”
Tim Middleton, Director of Policy and External Affairs at the PMI comments: “This third report continues the excellent work of its predecessors by investigating the key areas of concern to pension scheme trustees at the beginning of 2023. Drawing on the experience of 130 respondents, this survey highlights the principal issues that UK pension schemes will have to address this year.
Following a year characterised by the Cost of Living Crisis, war in Ukraine, the Autumn gilts crisis and the aftermath of the brief premiership of Liz Truss, the economic environment presents particular challenges for trustees in pursuit of the Nirvana of buyout.
This report is an excellent summary of the obstacles to effective stewardship of scheme assets and will be vital reading for anyone with an interest in scheme governance.”
The PMI’s FM Strategic Forum was created in partnership with 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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