The UK government’s mini budget statement in September has impacted defined benefit (DB) stakeholder priorities with a significant increase in focus on de-risking towards endgame, according to recent research by Russell Investments.

Prior to the government announcement, trustees and plan sponsors were primarily focused on improving funding levels (68%), managing risks (61%) and ESG (43%). However, since the mini budget announcement, the focus on de-risking towards endgame became more prominent with more than half of respondents ranking it as their main investment priority compared with a third before the minibudget – a stark increase of 20%.

Improvements to funding levels and managing risks fell back by 10% and 5%, respectively, in terms of priority, the research showed.

The findings are part of a major study by Russell Investments – The changing ecosystem of defined benefit pensions – a new biannual series surveying senior stakeholders in the UK DB market to understand their current views and priorities.

The study showed that inflation and central bank policy action are critical issues for pension trustees and sponsors, with 74% of respondents ranking these as their main concern in the next six months.

These concerns ranked higher (13% increase) among respondents following the UK mini budget, compared with those surveyed beforehand. The majority of respondents also cited significant fears over the prospect of recession and current geopolitical dynamics and their impact.

Simon Partridge, head of fiduciary management solutions at Russell Investments, said: “Rapid rises in interest rates, as central banks have sought to combat high inflation levels, have had a significant impact on funding levels and have left DB pension schemes in a much different position to that which they might have expected 12 months ago.”

He added: “This is leading many to revisit their long-term objectives and also review their decision-making structures and approaches. These discussions have been given renewed impetus by the volatility following the UK government’s mini budget statement in September, encouraging a greater focus on outsourcing.”

Asset allocation decisions

The study found this focus on de-risking towards endgame is being reflected in asset allocation decisions, with moves away from developed markets (32% of respondents) and emerging markets equities (12%), as well as property (17%) exposure.

Simon Partridge

Simon Partridge, Russell Investments

Investment grade credit (25%) and high yield credit (13%) appear to be beneficiaries of this trend, as do infrastructure (16%) and private credit (12%), reflecting the perceived attractiveness of the risk/return opportunities available in these asset classes.

Additionally, more than half of respondents said they expect to retain their current liability hedge ratios over the next two years, while just over a quarter expect to increase hedging. The proportion of respondents planning to increase liability hedge ratios has fallen 20% following the UK government statement, potentially reflecting the expected lower use of leverage going forward.

The Russell Investments study surveyed 76 UK DB pension schemes between August and October 2022, with respondents – including scheme chief executive officers, chief investment officers, trustees and pensions managers – responsible for over £100bn of assets under management. Over three-quarters of respondents were responsible for more than £100m of assets.

Climate change focus

DB scheme decision-makers appear increasingly focused on addressing issues relating to climate change, with over two-thirds of respondents (68%) indicating they were ‘likely’ or ‘very likely’ to increase their focus on climate change-related issues in the next 12 months. This is being applied through the use of scenario analysis to consider climate change risks, as well as discussing policies in this area with advisers and underlying managers.

Climate change also features prominently as a criterion in manager selection, with more than half of respondents (57%) highlighting manager research as a means by which they incorporate sustainability considerations into their investment portfolios.

Only a quarter (26%) use explicit exclusion policies to meet their climate change goals. Sustainability is being incorporated across entire portfolios by three-quarters of schemes (76%) rather than simply through specific allocations (20%) or by using single asset classes (9%).

The increasing importance of climate change to DB pension scheme stakeholders is also evident in their focus on setting net-zero targets; 36% of respondents have already set a target of 2050 or earlier, 47% are considering their approach while only 16% have decided not to set any target.

Read the digital edition of IPE’s latest magazine