It should be possible to pay 85%-90% of the estimated £3.3trn of promised benefits if schemes have the right risk management and investment strategies in place, according to Redington.
A report authored by Redington's Dan Mikulskis and Alex White, and University of Kent professor of actuarial science Paul Sweeting, sets out how choosing the right investment strategy at the right time can dramatically improve the chance of a defined benefit (DB) scheme paying full benefits to members. For example, it can increase from a 60% probability to a 75% probability for the same initial funding level and contributions.
It comes amid concerns in recent years that an increasing number of schemes are becoming cashflow negative, where they are paying out more in benefits than they receive from contributions. If contributions do not increase substantially, it means schemes' assets need to work harder to provide regular cashflows.
Head of DB pensions Dan Mikulskis said: "We've read so many times that 57% or so of schemes are cashflow negative, but what hasn't been put out there much is what that actually means for trustees, how does it affect their planning, what should they look at."
Investment strategy and risk management have a huge role to play and can give schemes a good chance of paying benefits, he added, estimating up to 90% of all benefits could be paid, although some will clearly not because of sponsor insolvency.
"Pension schemes should take a step back and look at what they're trying to achieve," said Sweeting. "They increasingly want to ensure they have enough money and correct investment strategies to meet their liabilities as they fall due. This measure in the report is a natural one for them to try to gauge how successful they are."
Investment strategies to bridge the cashflow gap will differ depending on how well-funded a scheme is. The report found schemes do not need to be funded on a full buyout level to be able to invest self-sufficiently, and there are investment strategies that give a good chance of meeting liability cashflows when they are well-funded but not to buyout level. For these schemes, having a cashflow-matched bond portfolio maximises the chance of paying pensions.
"Once schemes get to better funding, they have real choices on what they can do with investments, and should look at cashflow-driven asset classes, and go into more corporate bonds, and illiquid assets like direct lending," said Mikulskis. "Although they may be well-funded, they need to nail down their probability of paying pensions, and how to maximise that."
Meanwhile, less well-funded schemes should manage their risk and try not to let the situation worsen too much. "But they need to go for investment returns and generate growth to get them to a better place," he said. "They'll want to try to get more contributions from the sponsor too, because simply getting the funding level up would be the biggest influence on whether they can pay pensions in the future."
For these schemes, a more sophisticated and diversified approach which draws on the full range of liquid and illiquid credit strategies is best.
Sweeting said: "If schemes decide to try to make up some of the deficit through things like the illiquidity premium, and investing more creatively rather than just market risk, this will help a large number of schemes pay benefits in the long run."
"In the past when people looked at illiquidity it was about things like private equity, but it was difficult to measure it to see if you were getting a premium for it," he added. "When you're looking at things like private credit and less liquid fixed income asset classes, you can really see what the illiquidity premium is."
Morningstar Investment Management (MIM) has launched a range of three multi-asset funds that will blend active and passive strategies to offer advisers low-cost solutions.
The government will set up an infrastructure bank to support investment and to co-invest alongside investors including pension funds.
The Retail Prices Index (RPI) will be reformed and aligned with the housing cost-based version of the Consumer Prices Index, known as CPIH, by 2030, the Treasury has confirmed.
Estatee agent denies a shareholder’s absence from voting is an issue, finds Minerva Analytics.