Feature


With the majority of defined benefit (DB) pension schemes closed to further accrual, one chapter of the UK’s pensions history is gradually closing. Indeed, the number of people enjoying a guaranteed retire- ment income backed by a corporate sponsor is shrinking. Pension scheme liabilities have been weighing heavily upon corpo- rate balance sheets and most sponsors would like to see the back of them sooner rather than later. But the process will take time. In the meantime, trustees are being charged with ensuring that scheme members receive what they are entitled to. A difficult balancing act. More than 70% of schemes are looking to de-risk through passing the responsibility of paying their former employees’ pensions to an insurer within the next 10 years. Some are more ambitious, with 39% aiming to achieve this within the next five years, says Mercer. Yet with the events of the past few years showing how quickly condi- tions can change, a key question for many DB scheme trustees is: how do they manage their final years? With central banks on the verge of introducing monetary tightening and bond markets being historically volatile, the de-risking process has become less predictable. For instance, rising gilt yields have been good news for fixed income heavy investment portfolios. For the first time in more than a decade, final salary pension schemes have been consistently in surplus dur- ing the past year, according to the Pension Protection Fund (PPF). By the end of February, DB schemes in the PPF universe booked a solid aggregate surplus of £133bn, giving them a funding ratio of 109%. In contrast, just two years ago, the aggregate deficit stood at £124.6bn, meaning that final salary schemes were only 93% funded. This stark improvement is, of course, driven by the marginal rise in gilt yields combined with relatively favourable asset price valuations. But experienced trustees know that the pendulum could easily swing to the other side.


Another threat is a potential rise in inflation, which could wreak havoc on fixed income heavy portfolios. Granted, the majority of mature DB schemes have hedged most of their inflation and interest rate risk, but 70% of plans are not fully covered, according to Mercer.


A good year With DB balance sheets at generally favourable levels, now might be a good time to grasp some opportunities to de-risk more of their lia- bilities. It is no wonder then, that insurance companies are predict- ing a strong year for buyouts. But are trustees following suit? Buyout providers are optimistic that they will. Rohit Mathur, head of international reinsurance business at Prudential Retirement Strategies, believes that the market will con- tinue to grow. “All indications are pointing to a strong 2022,” he says. “It’s early in the year but consultants are predicting a similar market to last year, perhaps even a little bit higher at between £30bn to £40bn worth of PRT buy-in and buyout deals. Looking at the pipeline, that is a realistic assumption.” But the flow of transactions in the bulk annuity market has slowed


July–August 2022 portfolio institutional roundtable: Endgame investing 23


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