Exclusive: Over a third of schemes still to finalise endgame plans

Russell Investments’ study finds many DB schemes are having to accelerate their efforts

Jonathan Stapleton
clock • 4 min read
Simon Partridge: DB schemes are having to rapidly accelerate their efforts and planning
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Simon Partridge: DB schemes are having to rapidly accelerate their efforts and planning

Some 35% of defined benefit (DB) schemes are still undecided on their endgame objectives despite improved funding positions, research by Russell Investments finds.

The investment management firm's third UK DB market insights study - conducted between September and October 2023 among 107 UK schemes with total assets of over £250bn - found that, among those who had decided on their long-term target, buyout remained the most popular option, with 38% of all schemes surveyed saying this was their endgame strategy.

The survey - The Changing Ecosystem of Defined Benefit Pensions: Volume 3 - additionally found a further 21% of respondents were looking to runoff or low dependency strategies for endgame.

Russell Investments added just 5% of schemes had changed their endgame target in light of funding improvements over the past year - with much more focus being given to the timeframe to reach it.

It said 30% of pension scheme respondents were now working towards endgame within a shorter timeframe but noted they were seeing more challenges in their ability to adjust asset allocations and access buyout solutions.

The research found that almost a quarter of schemes now expect to reach endgame within a one-to-three-year timescale. As a result, de-risking towards endgame has increased significantly in importance for pension schemes over the last twelve months - with 56% of respondents identifying this as an investment priority, a rise of 11 percentage points compared to Russell Investments' first DB Market Study in the Autumn/Winter of 2022.

Despite this, it said pension scheme decision-makers also identified a number of potential challenges ahead - with a fifth of survey respondents highlighting the ability to access buyout providers as a major cause for concern.

Russell Investments head of UK fiduciary management Simon Partridge said he believed the reason why so many schemes were yet to finalise their endgame plans was down to the fact that the endgame target had previously been seen as so far away for many schemes.

Partridge added that, while some schemes had set their target as "buyout at some point" they hadn't formalised their plans, with many waiting to see the final version of The Pensions Regulator's revised funding code, now expected next year, before they do so.

He said, while there had been a bit of "wait and see", the fact endgame times had come in so much had brought the whole issue into "sharper focus".

Partridge explained: "DB schemes are having to rapidly accelerate their efforts and planning as significant improvements to funding levels over the last twelve months put many much closer to endgame than they would have previously anticipated.

"This does, however, bring challenges, with legitimate questions being raised over the capacity of providers to satisfy the increased demand for buyout solutions. Competition will be at a premium and schemes seeking to go down the buyout route will need to work in conjunction with their advisers over the coming months to satisfy the requirements of insurers."

Other key findings of the Russell Investments study included:

  • Concerns over inflation and central bank policies have receded significantly over the last six months. Russell Investments said, for the first time in this research series, a minority (48%) of respondents identified this as a key concern, a fall of 26 percentage points compared to twelve months ago. Concerns over recession have also fallen notably, declining by 29 percentage points over the last twelve months. Just one-quarter of respondents now identify this as a key concern, suggesting a greater sense of optimism towards the UK economy.
  • While Russell Investments said investment priorities remain largely consistent across the survey universe, a higher proportion of larger schemes (those with more than £1bn of assets) identify improving or maintaining funding levels (63% versus 49% of smaller schemes), de-risking towards endgame (62% versus 53%) and managing market risk (60% versus 47%) as key focuses. In contrast, a higher proportion of smaller schemes identify cashflow generation (27% versus 19% of larger schemes) and increasing levels of return (24% versus 19%) as investment priorities.
  • Decision-makers expect to decrease exposure to property (30%), developed market equities (20%) and private equity (16%) over the next six months, while allocations to government bonds (35%) and investment grade credit (31%) are anticipated to increase over the same period. However, respondents highlighted potential concerns about their ability to reduce exposure to illiquid assets, noting the significant demands being placed on secondary markets.
  • While improving ESG remains a key consideration for half of all schemes, the study found their decision-makers are increasingly cognisant of the difficulties they face in taking meaningful action on environmental issues. Just over a quarter (26%) of respondents indicated that they were ‘unlikely' or ‘very unlikely' to increase their focus on climate change in the next twelve months, compared to just 7% this time last year. Russell Investments said this potentially suggested climate change had become a lower priority in the context of other focuses for some schemes.

Russell Investments' Simon Partridge will be joined by Dalriada Trustees' Mark Clews and Pi Partnership Group's Amanda Burden to discuss the study in an exclusive webinar hosted by Professional Pensions tomorrow (5 December). Click here to register and find out more.

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