How the Mini Budget has altered DB scheme priorities

Government’s September announcement has increased focus on de-risking and endgame

Jonathan Stapleton
clock • 4 min read
Simon Partridge: DB schemes are in a much different position to 12 months ago
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Simon Partridge: DB schemes are in a much different position to 12 months ago

The government’s Mini Budget has impacted defined benefit (DB) stakeholder priorities with a significant increase in focus on de-risking towards endgame, a major new study by Russell Investments shows.

The investment management firm's study - which surveyed 76 DB schemes of a variety of sizes between August and October this year - found that, prior to the government announcement, trustees and sponsors were primarily focused on improving funding levels (68%), managing market risks (61%) and ESG (43%).

However, since the Mini Budget announcement, it said the focus on de-risking towards endgame became more prominent with more than half of respondents ranking it as one of their main investment priority compared to a third before the Mini Budget. It said the number primarily focussing on improving funding levels and managing risks had fallen back by ten and five percentage points respectively in terms of priority.

Respondents' current investment priorities (before/after Mini Budget)


Source: Russell Investments

Russell Investments' study also found that inflation and central bank policy action are critical issues for pension trustees and sponsors - with a total of 74% of respondents ranking these as their main concern in the next six months.

It said these concerns ranked higher among respondents following the UK Mini Budget, compared to those surveyed beforehand, with a nine percentage point difference between these two groups. The majority of respondents also cited significant fears over current geopolitical dynamics and their impact, and the prospect of recession.

Respondents' concerns over the next six months (before/after Mini Budget)


Source: Russell Investments

The survey also looked at scheme liability hedging ratios - with more than half of respondents saying they expected to retain their current liability hedge ratios over the next two years, while just over a quarter expect to increase hedging.

It found the proportion of respondents planning to increase liability hedge ratios had fallen by around seven percentage points following the UK government statement, potentially reflecting the expected lower use of leverage going forwards.

Expected changes to hedge ratios over the next two years

Source: Russell Investments

Russell Investments head of fiduciary management solutions Simon Partridge commented on the findings. He said: "Rapid rises in interest rates, as central banks have sought to combat high inflation levels, have had a significant impact on funding levels and have left DB pension schemes in a much different position to that which they might have expected 12 months ago.

"This is leading many to revisit their long-term objectives and also review their decision-making structures and approaches. These discussions have been given renewed impetus by the volatility following the UK government's Mini Budget statement in September, encouraging a greater focus on outsourcing."

Russell Investments' study found this focus on de-risking towards endgame is being reflected in asset allocation decisions, with moves away from developed markets and emerging markets equities, as well as property exposure.

It said investment grade credit and high yield credit appeared to be beneficiaries of this trend, as do infrastructure and private credit reflecting the perceived attractiveness of the risk/return opportunities available in these asset classes.

Expected increased asset allocation exposure over the next 12 months

Expected decreased asset allocation exposure over the next 12 months

Increased focus on climate change

The survey also found that DB scheme decision-makers appeared increasingly focused on addressing issues relating to climate change - with over two-thirds of respondents (68%) indicating they were ‘likely' or ‘very likely' to increase their focus on climate change-related issues in the next 12 months.

It said this is being applied through the use of scenario analysis to consider climate change risks, as well as discussing policies in this area with advisers and underlying managers.

Russell Investments said climate change also features prominently as a criterion in manager selection - with more than half of respondents (57%) highlighting manager research as a means by which they incorporate sustainability considerations into their investment portfolios.

It said the increasing importance of climate change to DB pension scheme stakeholders is also evident in their focus on setting net-zero targets. 36% of respondents have already set a target of 2050 or earlier, 47% are in the process of considering their approach while only 16% have decided not to set any target.

Use of outsourced investment capabilities

Greater expertise (55%), improved reporting and transparency (55%) and the application of strong governance structures (52%) were identified as the key reasons for DB schemes employing outsourced investment support, reflecting a clear preference towards improving decision-making and accountability.

Regulatory demands were cited by a number of respondents as a key consideration, with respondents from smaller DB schemes in particular noting the extent to which regulatory volume was becoming a concern and the need to ensure good governance structures are in place.

Russell Investments head of UK institutional, Middle East and Africa Jim Leggate said: "The UK defined benefit market has clearly been challenged over the last year, with increased uncertainty and market volatility adding to concerns over slowing growth, recession and climate change.

"Trustees and sponsors are responding to these challenges through changes to their strategic plans and asset allocations, as well as the deployment of outsourced support to strengthen decision-making and governance practices. We expect this trend to continue as schemes seek external expertise to meet their long-term goals."

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