The trustees of one in two DB schemes now have clear endgame strategy place, according to research from Standard Life.
However, a significant number of trustees remain concerned that market volatility could derail these plans – an issue cited by 40 per cent of respondents.
The survey questioned trustees of 50 of the largest DB schemes, with assets over £100m, looking at their concerns and considerations around de-risking.
The results reveal many trustees, regardless of whether they have a formal endgame strategy in place or not, cite barriers which may hinder their ability to pursue their plans to fully secure member benefits.
In addition to market volatility, investment strategy and a lack of engagement from sponsors was seen as major concerns.
In total the main barriers listed were:
- Market volatility (40 per cent)
- Issues with their investment strategy (36 per cent)
- Lack of sponsor engagement (32 per cent)
- The new DB funding code (26 per cent)
- General preparedness a potential buy-in or buy-out (26 per cent)
- Attracting insurer interest (20 per cent)
- Issues with data (18 per cent)
Standard Life managing director of defined benefit solutions and reinsurance Kunal Sood says: “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 per cent saying the recent changes in the market environment have prompted them to reduce their scheme’s allocation to illiquid assets as a priority.”
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 of trustees.
Sood adds: “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.
“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.”
