UK pension funds will be targeting lower returns for longer, according to the annual UK Fiduciary Management Survey of Trustees conducted by Schroders Solutions in conjunction with the Pensions Management Institute (PMI).

The research focused on a range of transformational events in the pensions industry over the course of 2022, as the industry was affected by multiple factors including the autumn Gilts liquidity crisis, the Russia-Ukraine war and the energy and cost-of-living crisis.

Tim Middleton, director of policy and external affairs at the PMI, said: “Following a year characterised by the cost-of-living crisis, war in Ukraine, the autumn Gilts crisis and the aftermath of the brief premiership of [former prime minister] Liz Truss, the economic environment presents particular challenges for trustees in pursuit of the Nirvana of buyout.”

Ronan O’Riordan, head of UK institutional business development at Schroders, added: “For many trustees, the pensions landscape has become increasingly complex, either because of regulatory changes, growing ESG requirements or the challenging investment landscape.”

The survey report also considered its impact on pension schemes in several areas, including their governance, liquidity, and endgame strategy.

Looking at the end game, the material increases in interest rates over 2022 have implicitly reduced the cost of insuring pension scheme liabilities with a third-party insurer, ie, buy-in or buyout. For many schemes, their timeframe to buyout reduced significantly despite market volatility in 2022.

However, the anticipated demand for buy-ins and buyouts is expected to exceed insurer capacity in 2023, recognised by some 28% of respondents who see insurer capacity constraints as the major hurdle to achieving a buyout.

In terms of steps that respondents plan on taking to improve operational resilience as a result of the Gilts crisis, 48% said they would be reviewing the operational aspects of their investment strategy such as dealing frequencies and settlement periods.

The survey also highlighted the growing importance of ESG in trustees’ investment strategy: two-thirds (64%) felt they knew enough about ESG and climate risks to make informed decisions on investment strategy and for ongoing oversight. However, 58% of respondents said that they remained heavily reliant on their investment advisers and/or investment managers to stay on top of regulatory guidance and to ensure ESG compliance.

This was even more pronounced for schemes with less than £1bn in total assets at 76%. This is leading to some boards establishing ESG sub-committees to ensure a dedicated focus on this area, the report stated.

Additionally, the research also disclosed that schemes are increasingly seeking to enhance their governance model through greater adoption of professional trustees, fiduciary managers, and third-party evaluators.

All respondents to the survey reported using at least one of these services, with 31% delegating to a fiduciary manager. Based on the survey results, it is estimated that over 270 UK pension schemes could move from traditional advisory to fiduciary management in 2023.

Meanwhile, 28% of respondents were using a third-party evaluator in some way. The research showed an increase in the number of respondents who see value in using a third-party evaluator to oversee a fiduciary manager rising from 27% of respondents in 2022 to 42% in 2023.

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