The funding position of the FTSE 350 pension funds on an accounting basis continued to improve with increased surplus as bond yields rose during last month driven by rising bond yields and growth market performance, according to Mercer’s Pensions Risk Survey data analysis for February 2023.

Mercer principal Matt Smith said the continued rise in funding levels will only increase the focus of many pension schemes and sponsors on risk transfer, but the real question should be whether other alternatives might add more value in high-yield environments.

“Trustees and sponsors are finding that with the current improved funding position they are reaching the end of their journey plan much sooner than expected and in many cases are defaulting towards a risk-transfer solution,” he said.

“The current market environment provides a great opportunity to revisit journey plans, consider adjustments to funding and investment strategies, but also consider whether risk transfer is the only option available. Risk transfer options, consolidators, [defined benefit] master trusts, captives as well as other risk management techniques may also be attractive options in a high yield environment, depending on the circumstances of the scheme,” Smith continued.

“It shouldn’t be one size fits all. Defaulting towards risk transfer presents a risk that other potential value adding pathways will be missed,” he said.

Smith noted that for those schemes targeting a risk transfer transaction in the near future, it is likely that the current market environment and strong funding positions will continue to provide opportunities for those that are ready to take them.

“The importance of having a robust plan in place, as well as clean data and understood benefits is higher than ever – but this is also true if alternative options are being considered. Regardless of an individual scheme’s end game it is important not to forget that data is key and should be the primary focus,” he said.

Mercer’s Pensions Risk Survey data analysis for February 2023 shows that the accounting surplus of DB schemes for the UK’s 350 largest listed companies increased to £47bn at the end of February 2023.

The present value of liabilities fell from £622bn at 31 January 2023 to £589bn at the end of February 2023, driven by a rise in corporate bond yields, offset to an extent by a rise in future implied inflation expectations. Asset values also fell to a lesser extent over the period to £636bn compared with £655bn at the end of January 2023.

Trustees warned of insurance firms’ TCFD reports for risk transfer selection

Defined benefit (DB) pension scheme trustees should be careful to focus on the detail in insurance firms’ Taskforce on Climate-Related Financial Disclosures (TCFD) reports, when selecting a firm for risk transfer, warned Hymans Robertson, as it launched its latest report Spotlight: Insurer TCFD reporting and net zero targets this morning.

The research looks at how DB pension schemes can best use the information in insurers’ TCFD reports as they make decisions about choosing a firm to insure their members benefits. It assesses some of the key challenges they face when looking at the data.

It also highlights that while many schemes might be encouraged by insurers’ headline targets and commitments, understanding which firm is a good fit for their needs will come from the ability to critically understand and assess the data in each TCFD report.

An example shown in the research is around the data included for net-zero carbon emission targets. It looks in detail at how firms can use different metrics in their report which may lead to a scheme not comparing like-for-like. They could end up, therefore, misunderstanding an insurer’s approach.

Paul Hewitson, head of ESG for risk transfer at Hymans Robertson, said: “Ultimately, for DB pension schemes who are on a journey to buyout but are also wanting to address climate risks, the devil is in the detail. Schemes could be forgiven for relying on the bolder statements in insurers’ TCFD reports. However, to really make an informed choice and choose a match that’s right for them, they should make sure they compare both how each insurer plans to transition their assets to meet targets, with the insurer’s actual progress.”

He added that the availability of this information gives pension schemes the opportunity to make even more informed decisions but it requires a focus on the long term.

“Instead of concentrating on the short-term goal of being fully funded to buyout, a consideration should be the role that insurers will play over a longer timeframe. As schemes become more familiar with the access to information in the TCFD reports, looking beyond the headlines should become second nature,” Hewitson said.

In the meantime, as familiarity is being established, schemes will find decision-making easier if they note the differences between each insurer’s approach to how and what is measured, he added.

Pension funds hold key to unlocking nature and wildlife potential

Pension funds can lead the way on critical investment to protect nature and wildlife and harness the potential for financial growth, according to a study published today by Scottish Widows.

The report, Nature and Biodiversity: The Pensions Imperative, outlines several policy and pension fund recommendations to convene industry action on this issue and enable nature-positive asset allocation throughout the financial services sector.

It calls on the UK government and regulators to deliver transformative policy action that demonstrates leadership, supports mobilisation of nature-positive capital from the finance sector, and optimises cross-stakeholder collaboration, and it encourages pension funds to consider the systemic risk of biodiversity loss and adopt the Taskforce on Nature-related Financial Disclosures framework, which will support better pension outcomes, risk management, and decision making.

The report also advocates for regulation of the voluntary carbon markets in the UK, to drive the setting of high-quality standards, help address the nature financing gap, and support actions on decarbonisation and preservation of nature.

Maria Nazarova-Doyle, head of responsible investments and stewardship at Scottish Widows, said: “While overseeing trillions of pounds worth of investments, pension funds play a huge role in the economy: their investment decisions don’t just influence the long-term financial wellbeing of millions of savers, but have the potential to influence the long-term health of nature and the planet too.”

However, she added: “In order for nature-positive pension investments to materialise, pioneers and policymakers must band together, doing more to engage and educate the industry on how to positively reshape portfolios and avert ecological collapse. This isn’t simply a balance-sheet issue – it’s an existential one too.”  

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