• Home
  • Admin/Tech
  • Benefits
  • Buzz
  • DB
  • DC
  • Diversity
  • Investment
  • Law & regulation
  • Risk reduction
  • Events
  • Newsletters
  • Sign in
  •  
      • Newsletters
      • Account details
      • Contact support
      • Sign out
     
    •  

      You are currently accessing ProfessionalPensions via your Enterprise account.

      If you already have an account please use the link below to sign in.

      If you have any problems with your access or would like to request an individual access account please contact our customer service team.

      Phone: +44 (0) 1858 438800

      Email: [email protected]

      • Sign in
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
    • YouTube
  • Register
  • Subscribe
  • Events
    • Upcoming events
      event logo
      The Future of Pension Scheme Data webinar

      This webinar will look at the future of pension scheme data – asking the steps that both DB and DC schemes, and their administrators, can take to improve their data; discuss what is best practice and assess the benefits of different approaches.

      • Date: 29 Jan 2020
      • London
      event logo
      Admin & Data Forum

      Professional Pensions is thrilled to announce the launch of our brand-new event for 2020, the Admin & Data Forum taking place on 11 February. This event sees the return of our incredibly popular Admin Forum but now with an additional focus on the technology and data issues that schemes are facing.

      • Date: 11 Feb 2020
      • London
      event logo
      Women in Investment Festival 2020

      Investment Week, Professional Adviser, Professional Pensions, Retirement Planner and Investment Europe have collaborated to launch the Women in Investment Festival 2020, in partnership with HSBC Global Asset Management.

      • Date: 03 Mar 2020
      • The Brewery 52 Chiswell Street London EC1Y 4SD, London
      event logo
      Rising Star Awards 2020

      The Professional Pensions Rising Stars Awards are about celebrating and recognising the achievements of those at the beginning of their career in the sector – shining a spotlight on their success and championing the organisations that do the most to develop young talent in the pensions industry.

      • Date: 01 Apr 2020
      • London
      View all events
      Follow our Professional Pension Events

      Sign up to receive email alerts about our events

      Sign up

  • Whitepapers
    • How DC schemes can gain exposure to different asset classes in a low-return environment

      So far, DC plans have largely been focused on the onset of auto-enrolment and changes to the regulatory framework - be it the ‘charge cap,' ‘pension freedoms' or consultations around ‘value for money', says Annabel Tonry, Executive Director at J.P. Morgan Asset Management (JPMAM).

      Download
      Pension freedoms three years on

      In 2015 George Osborne, then the UK Chancellor of the Exchequer, decided that those age over 55 could take much more of their pension in cash. This has since opened up a range of possibilities for DC scheme members in the world of pensions.

      Download
      Find whitepapers
      Search by title or subject area
      View all whitepapers
  • Spotlights
    • Spotlights

      Welcome to Professional Pensions's Spotlight section, where we focus in on particularly important themes and topics for the pensions market.

      Fiduciary Management Spotlight

      Professional Pensions, in association with Schroders, is hosting the Fiduciary Management Channel.

Professional Pensions
Professional Pensions
  • Home
  • Admin/Tech
  • Benefits
  • Buzz
  • DB
  • DC
  • Diversity
  • Investment
  • Law & regulation
  • Risk reduction
 
    • Newsletters
    • Account details
    • Contact support
    • Sign out
 
  •  

    You are currently accessing ProfessionalPensions via your Enterprise account.

    If you already have an account please use the link below to sign in.

    If you have any problems with your access or would like to request an individual access account please contact our customer service team.

    Phone: +44 (0) 1858 438800

    Email: [email protected]

    • Sign in
  • Industry

Partner Insight: Finding surer paths to DB pension scheme endgames

Jos Vermeulen - Head of Solution Design
Jos Vermeulen - Head of Solution Design
  • Professional Pensions
  • 07 October 2019
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
0 Comments

DB pension schemes need to increase certainty about potential outcomes to help them reach their chosen goal, says Jos Vermeulen of Insight Investment

Defined benefit (DB) pension schemes are at a watershed, with more than 80% effectively closed to new members and 40% also closed to future accrual.1 Many trustees and sponsors would like to move to an ‘endgame' that secures all their scheme's obligations, such as a full buy-out of pension obligations by an insurance company or self sufficiency with little dependency on their sponsor.

Problem: Most schemes don't yet have enough assets to fund all their liabilities. So how can schemes plot a sure path from where they are now towards their goal?

Finding the path

The first step, says Jos Vermeulen of Insight Investment, is to identify your preferred goal - such as a buy-out in ten years - so that you can explore a range of possible paths towards it.2 He says that schemes usually find that paths employing traditional ‘return seeking' strategies result in uncertainty. These strategies offer too wide a range of potential outcomes because of investment and other risks including inflation and longevity risk.

Insight argues that like an individual employee approaching retirement - moving from asset accumulation to decumulation - pension schemes moving towards endgames must shift their focus from return generation to outcome certainty. "Cash-flow negative schemes have shortening time horizons that leave much less time to recover from unforeseen shocks," Vermeulen explains.

Schemes have had to deal with the unexpected many times over the last decade including market volatility after the global financial crisis, prolonged low interest rates, the Brexit vote, and accelerated cash outflows after George Osborne's 2015 pension freedoms.

"So the key goal is to narrow the range of potential future outcomes", he says, using the wider toolkit now available in the pension scheme armoury. Insight suggests following three steps:

• Lock down outcomes by hedging liability risks including interest rates, inflation and longevity, often perceived as the most difficult risk to handle

• Solve the uncertainty problem by investing in contractual assets such as bonds to generate the cashflows and returns needed to meet obligations

• Manage liquidity to ensure the scheme can cover its outflows and avoid being a forced seller in difficult markets

The Insight team recognises that no solution can be 100% perfect, so schemes should create buffers by stress testing any residual risks such as reinvestment risk or the risk of default in their bond portfolios. They should also construct portfolios that preserve flexibility to help deal with any setbacks.

  1. Source: The Pensions Regulator, November 2018.
  2. Over half FTSE 100 schemes might be in a position to move to insurer buy-out within 10 years. See K. Kaveh, How Close Are DB Schemes to the Endgame?, Professional Pensions, 11 July 2019, pp.14-15.

IMPORTANT INFORMATION

RISK DISCLOSURES

Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations.

ASSOCIATED INVESTMENT RISKS

Where the portfolio holds over 35% of its net asset value in securities of one governmental issuer, the value of the portfolio may be profoundly affected if one or more of these issuers fails to meet its obligations or suffers a ratings downgrade.

A credit default swap (CDS) provides a measure of protection against defaults of debt issuers but there is no assurance their use will be effective or will have the desired result.

The issuer of a debt security may not pay income or repay capital to the bondholder when due.

Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.

Investments in emerging markets can be less liquid and riskier than more developed markets and difficulties in accounting, dealing, settlement and custody may arise.

Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio.

Where high yield instruments are held, their low credit rating indicates a greater risk of default, which would affect the value of the portfolio.

The investment manager may invest in instruments which can be difficult to sell when markets are stressed.

Where leverage is used as part of the management of the portfolio through the use of swaps and other derivative instruments, this can increase the overall volatility. While leverage presents opportunities for increasing total returns, it has the effect of potentially increasing losses as well. Any event that adversely affects the value of an investment would be magnified to the extent that leverage is employed by the portfolio. Any losses would therefore be greater than if leverage were not employed.

This document is a financial promotion and is not investment advice. Unless otherwise attributed the views and opinions expressed are those of Insight Investment at the time of publication and are subject to change. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Insight does not provide tax or legal advice to its clients and all investors are strongly urged to seek professional advice regarding any potential strategy or investment.

Issued by Insight Investment Management (Global) Limited. Registered office 160 Queen Victoria Street, London EC4V 4LA. Registered in England and Wales. Registered number 00827982. Authorised and regulated by the Financial Conduct Authority. FCA Firm reference number 119308.

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
  • Topics
  • Industry
  • investment
  • Pension saving
  • hedge funds
  • FTSE
  • partner insight

More on Industry

This week's top story was women not being able to escape the gender pensions gap
Five stories you may have missed this week

This week’s top stories include an article about women remaining at risk of running out of money in retirement, and one about Buck winning 36 additional client contracts since launching as an independent business last year.

  • Industry
  • 13 December 2019
Biggest victory since Margaret Thatcher
Tories win landslide majority in 'disappointing' election for Labour

After a tumultuous few weeks of campaigning, the Conservative party won their largest majority since Margaret Thatcher's 1987 victory in last night’s general election, while Labour is facing its worst defeat since 1935.

  • Industry
  • 13 December 2019
DWP must review general levy calculation

A review of how the general levy is calculated must be undertaken by the Department for Work and Pensions, 70% of this week’s 90 Pensions Buzz respondents said.

  • Industry
  • 13 December 2019
Taylor Wessing has published a report gauging industry views on challenges associated with pensions restructuring.
What pensions restructuring challenges have arisen over the past year?

Taylor Wessing has published a report gauging industry views on challenges associated with pensions restructuring. Kim Kaveh explores the findings

  • Industry
  • 12 December 2019
The Resolution Foundation said household wealth is “far from equally distributed”
Pensions have become the 'largest component' of household wealth

Pensions have overtaken household property wealth to become the largest component of household wealth, according to analysis from the Resolution Foundation.

  • Industry
  • 12 December 2019
blog comments powered by Disqus
Back to Top

Most read

General Election 2019: The pensions manifesto pledges
General Election 2019: The pensions manifesto pledges
PP Rising Star Awards 2020: Full nominee list revealed!
PP Rising Star Awards 2020: Full nominee list revealed!
Buck wins 36 UK business clients after independent launch
Buck wins 36 UK business clients after independent launch
Bulk annuity market to 'top £0.5trn in 2020s'
Bulk annuity market to 'top £0.5trn in 2020s'
Pensions have become the 'largest component' of household wealth
Pensions have become the 'largest component' of household wealth
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters
  • YouTube

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017