Half of defined benefit (DB) pension scheme trustees have a “clear” endgame strategy in place. However, they anticipate challenges in delivering it, according to research from Standard Life.
Standard Life, part of Phoenix Group, surveyed 50 DB pension scheme trustees of funds larger than £100m, exploring their concerns and considerations around their approach to de-risking.
The results showed that many trustees, regardless of whether they have a formal endgame strategy in place or not, cite a series of key barriers which may hinder their ability to pursue their plans to fully secure member benefits.
Market volatility was cited as the key concern by 40% of surveyed trustees, closely followed by investment strategy (36%) and lack of engagement from sponsors (32%).
Another barrier cited by 26% of respondents was the upcoming new DB Funding Code which outlines how pension schemes should de-risk and allocate investments toward low-dependency funding by the time of ‘significant maturity’.
Other barriers included general preparedness for a potential buy-in or buyout (26%), attracting insurer interest (20%) and issues with data (18%).
Commenting on the barriers faced by trustees, Kunal Sood, managing director of DB solutions and reinsurance at Standard Life, said that external factors such as the potential for a fall in Gilt yields, present a risk to schemes that are not well-hedged, as do challenges around any illiquid asset holdings the scheme might have.
He continued: “Trustees do, however appear to be reacting to this challenge, with 40% of trustees saying the recent changes in the market environment have prompted them to reduce their scheme’s allocation to illiquid assets as a priority.”
On the funding code as a barrier, Sood said that in practice, most schemes are likely to be complying with the principles set out in the code already, and with the minimum requirement for sponsors to maintain full funding for significantly mature schemes, it is “possible that sponsor engagement improves and reduces that barrier for trustees”.
On the rest of the barriers, Sood said that bulk purchase annuities are widely considered to be the “gold standard” when it comes to de-risking.
He said: “Our research reveals that four-fifths of pension scheme trustees do expect to approach an insurer about a buy-in or buyout in the next five years.
“With no signs of the market slowing down, schemes should remain focused on preparation and solid data, which continue to play a vital role in ensuring a smooth and efficient de-risking journey,” he noted.
Sood added there should also be a “greater emphasis” on finding and choosing the right partner that supports schemes’ long-term objectives, especially as many trustees report concerns over a lack of engagement from sponsors and consider it a barrier to pursuing their endgame strategy.
He continued: “We are not aware of any schemes that haven’t obtained a bulk annuity quotation, and we believe there is sufficient appetite in the bulk annuity market to service all those schemes that desire insurance.”
“For our part, we are ready to engage with DB scheme trustees to help meet their overarching endgame strategies and secure member benefits,” he concluded.
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