Rising rates prompt further acceleration of de-risking towards endgame

Decision maker focus on endgame de-risking has increased markedly since end of last year

Jonathan Stapleton
clock • 3 min read
Simon Partridge: Decision-makers have had to revisit their long-term objectives as a result of rising rates
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Simon Partridge: Decision-makers have had to revisit their long-term objectives as a result of rising rates

UK defined benefit (DB) pension schemes are rapidly accelerating efforts to de-risk towards endgame, Russell Investments latest UK DB market insights study finds.

The investment management firm's study - which surveyed 132 DB schemes representing a total of over £300bn of assets under management between March and May this year - found that, while the improvement and maintenance of funding levels (60% of respondents) remains the most important priority for pension schemes, there had been a significant rise (up 11 percentage points to 56%) in the importance decision-makers are placing on de-risking towards endgame compared to the fiduciary manager's previous study last year.

Russell Investments' research, The Changing Ecosystem of Defined Benefit Pensions: Volume 2, found that the focus on de-risking towards endgame is being reflected in asset allocation decisions. It said fixed income assets were a particular beneficiary of this trend, with 24% of respondents planning to increase allocations to government bonds and 23% to investment grade credit. In contrast, allocations to illiquid assets - specifically property (20%) and private equity (10%) - were expected to decrease as were developed market equities (17%) and emerging market equities (10%).

Other key findings from the research showed that inflation and central bank policy action remained critical issues for pension trustees and sponsors, with 71% identifying these as their main concern in the next six months - a similar level to last year's study.

But, despite the extreme immediate concern arising from the UK mini-budget and resulting gilt market sell-off in September 2022, the long-term impact of these events appears to have been more muted than might have been anticipated, particularly for larger DB schemes. Some 64% of respondents indicated that the mini-budget and gilt sell-off had had ‘limited' or ‘very limited' impact, with 9% reporting no impact at all.

Russell Investments head of UK fiduciary management Simon Partridge said: "Pension schemes have experienced a considerable change in circumstances over the last twelve months. Rising interest rates have had a major impact on funding levels, in some cases accelerating the journey to endgame by 3-5 years.

"Many decision-makers have had to revisit their long-term objectives as a result, with this being reflected in changes to asset allocations and investment priorities as schemes seek to take full advantage of their improved positions."

Regulation and transparency

The survey also found increasing, and potentially excessive, regulatory demands were now being seen as a significant future obstacle for pension schemes, with almost half (49%) of respondents identifying excessive regulation as the biggest challenge facing the UK DB market. The survey found transparency (46%) and cost (33%) also featured prominently in this context.

Respondents identified the demands on resource and time when considering the challenges posed by regulatory requirements.

It said this was particularly the case among those schemes that do not currently employ an outsourced provider, with 57% identifying regulation as a key industry challenge compared to 40% of schemes that employ an outsourced provider.

Russell Investments head of EMEA sales and clients Jim Leggate added: "UK defined benefit decision-makers are clearly reacting to the changed circumstances they find themselves in, with changes being made to long-term objectives, strategic plans and asset allocations.

"Outsourcing has a critical role to play in this context, both to support schemes in meeting their objectives and in managing the burdens posed by an increasingly complex market and regulatory environment. We expect to see further growth in schemes using outsourced expertise, as they look to strengthen existing provisions on their journey to their endgame."

Respondent investment priorities

Source: Russell Investments

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