February gilt rate rise sparks call for DB 'spring clean'

Broadstone says DB funding positions remain stable but buyout positions are improving

Jonathan Stapleton
clock • 3 min read

There was very little change in the funding position of defined benefit (DB) pension schemes despite gilt yield rises through February, Broadstone’s Sirius Index finds.

The consultancy's February index update - a monitor of how various pension scheme strategies are performing on their journeys to self-sufficiency - showed that gilt yields rose and growth assets fell over the month, resulting in smaller assets, liabilities and therefore deficits.

It said the combined impact of these changes for the fully hedged scheme was to maintain its position while there was a slight improvement in funding level for the 50% hedged scheme. Low dependency funding for fully hedged schemes remains stable as half hedged schemes benefit from a two percentage point rise to 97.5%.

The firm said that, with an uncertain economic outlook, now is the perfect time for schemes to give funding and investment to-do lists a spring clean.

Broadstone head of trustee services Chris Rice said the index update highlighted the work that trustees and sponsors should be doing as we approach the March round of trustee meetings.

He said: "We would hope to see trustees addressing their funding position and ensure their journey plan is on target.

"In some cases, trustees will see they are ahead of where they thought they would be, which does present its own challenges. For instance, if buyout is the target for the scheme, suddenly being in striking distance will bring into sharp relief the work required to get the scheme insurer ready, funding strategy is only one part of this equation."

Rice added: "Administration and data will need detailed review and legal review of documentation is integral to getting a deal over the line. Trustees underestimate those exercises at their peril. Trustees and sponsors without a clear buyout plan should do what they can to put one in place."

Broadstone head of investment consulting services Marc Devereux said trustees should also take the time to review their liability matching assets.

He explained: "The events across September and October will have prompted most trustees using liability-driven investments to review these arrangements, including levels of leverage, resilience, and governance protocols.

"Some trustees may find they can hedge appropriately with lower, or no, leverage, while others will be reviewing their collateral arrangements and the overall impact on strategy. We continue to work with our clients to understand their specific position and ensure aspects of funding and investment strategy are reviewed appropriately."

Funding gains

This comes as XPS Pension Group's latest bulk annuity tracker has revealed that full scheme transactions now dominate the DB pensions bulk annuity landscape as schemes' funding positions have improved significantly.

The consultancy said the trend away from pensioner only buy-ins to full scheme transactions has continued in 2023, with all £10bn of deals announced in the year so far being full scheme transactions. It said this is due to the significant funding gains made last year and concerns about liquidity for those schemes previously contemplating phased pensioner buy-ins.

Yesterday, XPS's DB:UK tracker estimated that buyout funding levels increased for a portfolio of typical schemes from 69% at the start of 2022, to 95% at the end of 2022 as a result of higher gilt yields, lower cost longevity pricing, insurer competition and asset outperformance.

XPS risk settlement partner Harry Harper commented: "As a result of improved scheme funding, the bulk annuity market is now busier than it's ever been, with record volumes in the market and some insurers already in exclusivity arrangements on a number of significant buyout transactions.

"We fully expect 2023 to be a record year, exceeding 2019's £44bn of transactions. With such high demand, we are seeing insurers become increasingly selective on which deals they'll bid on, making it more important than ever for schemes to adequately prepare for transactions ahead of going to market."

Read more

Professional Pensions' DB Funding Index

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