The increasing volume of regulation and its resulting impact is now seen as the most pressing concern for pension schemes, with almost half of decision-makers identifying this as the biggest challenge they face, according to Russell Investments’ defined benefit (DB) market insights study.

Russell Investments surveyed over 100 senior stakeholders in the UK DB market, representing a combined £270bn of assets to understand their current views and priorities, producing its report: The changing ecosystem of defined benefit pensions.

The study showed that concerns over regulation have more than doubled – rising from 20% in the first survey in autumn/winter 2022 to 46% in this latest study. However, worries over the market environment have continued to recede as decision-makers appear to feel greater levels of comfort with the current macroeconomic climate.

Only a third of respondents identified inflation as a key concern (more than halving from 71% 12 months ago), while just 11% of schemes surveyed said they worried about the threat of recession (more than halving from 28% 12 months ago).

As a result, almost three-quarters of schemes surveyed indicated that they have appointed or plan to appoint an outsourced provider, with the depth of expertise available (51%), risk management (51%) and improved governance structures (39%) identified as the main reasons.

Reporting and transparency (36%) and cost reductions (30%) were also cited as reasons for employing outsourced capabilities as pension schemes recognise the need for additional support to address a range of competing priorities, tackle increasing regulatory requirements, and meet their long-term goals.

Endgame and de-risking

The research also identified a divergence in the priorities of pension schemes depending on their size, reflecting their different funding positions, asset allocations and endgame objectives.

De-risking towards endgame remains the main priority for half of large schemes (with assets over £1bn) but is currently a key focus for only a third (34%) of schemes with assets below £1bn. In contrast, improving and maintaining funding levels (51%) is the top priority for the majority of smaller schemes.

Asset allocation

The study also showed that asset allocation plans appear to be evolving with a renewed interest in developed and emerging market equities. Research showed that 19% of respondents indicated plans to increase their allocations to developed market equities in the next six months (nearly doubled from 9% 12 months ago), while 15% plan to grow their emerging market equities allocations (more than doubled from 7% 12 months ago).

It also showed that there continues to be a growing appetite among investors for exposure to private credit, with 16% of respondents indicating plans to increase their allocations over the next six months, up from only 9% a year ago.

Respondents also indicated that they are likely to decrease exposure to property, however with a proportion of respondents seeking to divest falling to 17% from 30% in autumn/winter 2023.

Russell Investments said this suggests that schemes may have managed to redeem their holdings despite the challenging environment or that nearly half have changed their minds and are retaining these assets.

Schemes also expressed plans to increase their exposure to fixed income, however the appetite for the asset class has decreased relative to previous studies. The proportion of respondents planning on increasing their exposure to government bonds and investment grade credit has fallen by 7% (to 28%) and 8% (to 23%), respectively, compared to autumn/winter 2023.

In contrast, pension schemes are showing more appetite towards developed market and emerging market equities, with 19% and 15% of respondents, respectively, expecting to increase allocations in the next six months.

This represents the highest proportion planning to increase allocations to these asset classes since Russell Investments first conducted its six-monthly DB market study in late 2022.

This, according to Russell Investments, indicates a greater level of risk appetite among pension schemes, possibly due to greater optimism around market conditions.

Simon Partridge, head of UK fiduciary management at Russell Investments, said that while DB schemes are more optimistic about the market environment, it is “clear” that decision-makers are feeling pressure in other areas.

He said: “Regulation is an evident and growing concern which, combined with the work needed to meet an accelerated endgame timeframe, is placing sizeable demands on schemes’ resources.

“Demand for outsourcing continues to increase as schemes seek additional support, robust governance structures and flexible investment solutions to achieve their long-term goals.”

Patridge added that as schemes face a new set of challenges, ensuring that resources are deployed and utilised in the “most efficient manner”, including using outsourced support where required, will be “critical” for schemes to navigate the operational, asset allocation and regulatory challenges to meet their long-term goals.

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