Industry Voice: Is it time to get off the DB rollercoaster?

clock • 3 min read
Charlotte Quarmby, Associate Partner, Aon

Charlotte Quarmby, Associate Partner, Aon

The effects of the current economic volatility are being felt around the world but no more acutely than by those running defined benefit (DB) pension schemes here in the UK.

The aftermath of the Mini Budget delivered on 23 September sent pension schemes into a spin and caused chaos for many trustee boards and sponsors.

With long-term gilt yields at an almost 15 year-high, liabilities have dropped significantly for many schemes since the start of 2022 and in turn, improved their funding levels. But even the most thrill-seeking trustees are likely to have found the pace and volatility uncomfortable.

Not only did it result in sudden collateral calls for those with leverage in their portfolio, but many schemes also saw potentially huge changes to their endgame planning. Is this a good thing? Well, yes, but the sudden improvements have now given schemes a new set of challenges to consider. 

Investment considerations 

The repercussions of the mini-Budget placed investment consultants on speed dial to deal with collateral calls and, in some circumstances, bank the funding level gains. However, while this market shock prompted immediate actions, many schemes will have already watched their funding level climb throughout 2022, making their endgame look closer than ever before.

Schemes which are getting closer to their endgame, should be turning their attention to hedging against insurer pricing. Unfortunately, the investment strategy for each insurer varies, which means making a perfect match is almost impossible. However, it is possible to find a happy medium and track ‘average' insurer pricing to make the transition to buyout easier. This is an approach that requires specialist risk settlement experience and knowledge, and one that Aon has successfully implemented, assisting many schemes to achieve buyout.

Preparation for buyout

It is no surprise that there has been an increase in the number of schemes trying to get off the DB rollercoaster, given the recent funding level improvements. However, it is a ‘single file only' exit queue, due to insurers having limited resources available to meet the demand. This means, at least in the short-term, that only those who are the best prepared will be given the green flag into the fast-track exit lane. Realistically, this means those with good quality data, an insurer-ready benefit specification and alignment from the trustee board and sponsor are the only ones likely to make the short list.

If schemes have not yet ticked off these items, a strategic plan needs to be formulated so they are completed before an approach to the risk settlement market can be made. 

It should also be noted that it is not just insurers who are busy, but also administrators, therefore these plans need to be carefully designed to integrate other projects such as the pensions dashboards and GMP equalisation. Integrating these important projects in an efficient, cost-effective manner for the administrators will help you avoid an increase to the queue time.

Reaching the end of the track

So, is it time to get off the DB rollercoaster? Many schemes think so and are seeking to exchange the highs and lows for the safer ground of the insurance regime.

For the schemes that are not quite ready to make the final step, they may find themselves strapped in for a while longer. But by working with a specialist risk settlement advisor, making the necessary changes to asset strategy and strategic plans, the final stages to the nearest exit should be much smoother.

Further information on smoothing the journey to your endgame and how Aon can help can be viewed here.


This post is funded by Aon

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