Feature – De-risking
DE-RISKING:
TIME FOR A RE-THINK?
The world today looks very different to how it did in 2020, when David Fairs, head of policy at The Pensions Regulator (TPR), introduced his proposals to secure the funding status of defined benefit (DB) schemes.
Back then, record low interest rates were a pressing concern, inflation was low and the world was yet to hear of Covid-19. Two years on, inflation has hit double-digits in the UK and the global economy has been brought to a grinding halt by a pan- demic. There is now a bigger risk of sponsor default. At the same time, rising gilt yields have completely changed esti- mates of the present value of liabilities and most DB schemes report a surplus.
Over the course of just two years, the funding ratio of schemes in the Pension Protection Fund’s (PPF) universe jumped to more than 110% from around 70%. As of July, schemes collec- tively sat on a surplus of more than £250bn, according to the PPF. This is despite a significant drop in the assets they hold, from almost £1.8bn in 2020 to around £1.6bn two years later, due to a rapid fall in s179 liabilities.
42 | portfolio institutional | October 2022 | Issue 117
And there is another factor to consider: more than 80% of final salary schemes are cashflow negative and in the next 10 years, 98% will no longer receive contributions, according to Mercer. This means that investment strategies will have to navigate capital preservation and cashflow management strategies. At the same time, schemes that are still open manage significant assets, from USS and Railpen to the local government pension scheme pools.
Stronger balance sheets may have accelerated the endgame for many DB schemes, but investment returns are harder than ever to predict. This raises the question: how should DB schemes approach de-risking?
The death of DB?
The stated aim of TPR’s new funding rules is to strike a bal- ance between ensuring that final salary scheme members – some 10 million of them across the UK – receive their benefits in full, whilst ensuring that sponsors can afford to sustain the pension. The regulator also has to create a careful balance
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