A typical defined benefit (DB) scheme was able to meet 92.9% of its accrued pension rights as of 30 September, according to Legal & General Investment Management (LGIM).
The figure is 130 basis points (bps) higher than at the end of June, the asset manager said in its inaugural DB health tracker, which it has launched in a bid to improve scheme decision-making around cashflow-matching investment strategies.
The improvement was largely due to asset performance, excluding hedges, and changes in nominal bond yields, which enhanced the position by 70bps and 80bps respectively.
While changes in expected inflation and realised inflation experience resulted in a 40bps deterioration, other factors such as changes in the chance of sponsor insolvency and cashflow drag, offset this by 20bps.
The index estimates the average DB scheme's expected proportion of benefits met (EPBM) based on data from the Pension Protection Fund's (PPF) annual Purple Book.
The 2017 version found a typical scheme held 30% in equities, 55% in bonds or liability-driven investment (LDI) assets, 5% in property, and 10% in other assets. LGIM further assumes a hedge ratio of 50% of liabilities.
Speaking to PP, LGIM head of portfolio solutions Graham Moles said the "simpler" EPBM metric allows schemes to understand the benefits of certain investment strategies.
"Schemes are maturing quite a lot and, actually, the investment strategies are changing as well, so there's obviously been a lot of talk about things like cashflow matching," he said.
"The thing with cashflow matching is what you're doing is you're building an exceptionally long-term strategy, but the problem is the framework of deciding if that's a good thing to do, how much to do, and what sort of assets to use, is still the old framework, which is based on looking at minimising volatility on a short-term measure."
This measure tries to take account of the risk of sponsor default, and the benefits or disadvantages of moving to a cashflow-matching strategy at certain points in a scheme's life.
"We are concerned that, without a framework like this, schemes may move into a lower-risk cashflow matching type strategy too quickly, maybe locking themselves into a strategy that almost guarantees failure," Moles said.
LGIM added that if the typical scheme was to diversify some equity into credit and alternatives, and use leveraged LDI to maintain hedging but reduce cash drag, the index's figure would rise further to 94.1%.
Moles added an individual scheme's decision on this, however, will depend on their assumptions about their sponsor's longevity - and the measure can be quite sensitive on a scheme-by-scheme basis.
"What we're not trying to create here is a metric that ends up being a lot more stable," he added. "What we're trying to do is create a metric which brings in a long-term focus to decision-making.
"The key message here is schemes should not, in our view, be purely focusing on short-term risk as their decision-making strategy."
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