Defined benefit (DB) pension schemes in the UK have seen a healthy improvement from the sharp decline experienced at the start of the pandemic and are now far stronger than during pre-COVID times, according to Legal & General Investment Management (LGIM).
LGIM’s Health Tracker, a monitor of the current health of UK DB pension schemes, found that the average DB scheme can expect to pay 98.2% of accrued pension benefits as of 31 March 2021, up 6.8% from 31 March 2020.
The tracker has also shown a 1.1% improvement quarter-on-quarter against the funding level of 97.1% at 31 December 2020. This latest improvement means LGIM’s measure has shown a continuing improvement in each of the last four quarters.
However, it is important to note that these figures may yet still understate the negative impact of the pandemic, due to a weakening of covenants that many schemes will have endured, the firm noted.
The findings show that the first quarter of 2021 was another good period for LGIM’s Expected Proportion of Benefits Met (EPBM) measure of scheme health, with the ratio rising by 1.1% from 97.1% at 31 December 2020 to 98.2% at 31 March 2021.
John Southall, head of solutions research at LGIM, said: “The change was largely driven by a rapid rise in nominal interest rates, the sharpest three-month increase seen in years, benefitting schemes that haven’t fully hedged their interest rate risk.”
He added that these benefits were partially offset by a rise in expected inflation – increasing inflation-linked liabilities – but growth assets also posted a strong quarter, boosting asset values.
“One notable feature of our EPBM measure is that it cannot exceed 100%. As the EPBM figure edges closer to 100%, continued positive experience for schemes has a smaller marginal impact on our measure,” he said.
“From a covenant perspective we chose to retain a typical sponsor rating assumption of BB in our calculations as confidence in the recovery improves. Whilst the long-term impact of the pandemic remains unclear, fiscal and monetary actions have been extremely supportive. We noted that if a rating of B was assumed, the EPBM figure at 31 March 2021 would be around 1.1% lower,” he noted.
DWS, Tikehau set up secured income fund for DB schemes
DWS has partnered with Tikehau Capital to launch a secured income fund aimed at small to medium-sized DB pension plans that are looking for stable, long-term returns.
The fund provides a diversified portfolio of secured income assets, including infrastructure debt, real estate debt, direct lending, asset-backed securities, collateralised loan obligations and leveraged loans.
Over half of UK DB pension plans are in deficit, with insufficient assets to meet their liabilities, DWS said. The fund will offer these plans “enhanced security of income through a solution where diverse private and structured credit assets are combined into a single, easy-to-access pooled fund”, it added.
For small and mid-sized DB funds, which may have been restricted from investing in individual asset classes due to minimum size or governance requirements, this latest innovation offers the opportunity to invest in a pooled fund of secured income assets, DWS said.
A spokesperson for DWS told IPE that the AUM cap for the fund is £750m (€873.8m) but there is an initial £500m target.
“We are in advanced conversations with multiple prospects – both direct pension funds and investment consultants, but we cannot disclose those names,” the spokesperson added.
The launch is the latest innovation for pension funds following The Asset Management Exchange (AMX) and DWS’s recent launch of an investment solution that allows pension plans to express stewardship preferences in pooled funds.
National Trust awards climate change mitigation mandate
Conservation charity National Trust has awarded Robeco with a £75m (€87m) mandate to be its partner in achieving the charity’s commitment to become carbon net zero by 2030.
Advised by Cambridge Associates, National Trust made the appointment to reflect the goal of aligning its investment strategy with its objective to mitigate climate change and protect the natural environment.
This investment, it said, also represents seed assets for Robeco’s Climate Global Credits Fund, which invests in a global portfolio of diversified corporate bonds with explicit climate targets that contribute to the goals of the Paris Agreement.
Robeco’s strategy starts with a 50% lower carbon footprint than the broader corporate bond market, and aims to decarbonise by 7% per year while outperforming its newly created Paris-aligned benchmark, the Solactive Paris Aligned Global Corporate Index, which was developed jointly with Robeco.
Climate change considerations are fully integrated into the investment process and portfolio construction, with engagement carried out by Robeco’s Active Ownership team also being part of the strategy.