UK pension schemes are increasingly focusing on being ‘settlement ready’ in their investment approaches this year, according to a leading global professional services firm.
Defined benefit pension schemes are now opting for buyout as their long-term target rather than just self-sufficiency, according to Aon’s Global Pension Risk Survey 2021/22.
Schemes are more aware that they need to take steps such as data cleansing, providing benefit specifications or agreeing their governance structures, Aon said. They also know that these projects need to start well in advance of a transaction to ensure there are no delays when the right insurer pricing becomes available. Schemes are also seeing benefits from taking the same approach with assets by investing with the buyout’s endgame in mind and starting their preparation as early as possible, the firm added.
“Whatever the timeframe they have in mind for reaching their scheme’s endgame, trustees need to think about the most efficient investment strategy that will allow them to reach it,” said Aon partner Lucy Barron. “There are several investment options to consider that give schemes the best opportunities. Ensuring liabilities are fully protected against movements in interest rates and inflation helps reduce the risk of assets moving in a different direction – something which is increasingly a consideration.
“Trustees will need a portfolio that is well-diversified so that it can navigate volatility and generate the returns needed but with the least risk possible. It also needs to give them the option of sufficient flexibility and liquidity to capture opportunities should they arise earlier. Similarly, holding credit can provide some protection against insurer pricing moves, as it is often an attractive asset for insurers.”
Aon’s risk settlement team, which worked on more than £7.8bn of transactions in 2021, also found several advantages from early investment preparation. These include avoiding roadblocks such as long-dated illiquid assets that increase risk and cost, and matching insurer pricing by allocating more to assets such as gilts, swaps and credit. Other advantages include reducing exposure to growth assets that increase volatility against insurer pricing, and opting to integrate buy-ins to reduce risk and cost ahead of full buyout.
“The ultimate aim is for the scheme to get to buyout with reduced risk and more certainty,” Barron added. “That involves thinking about managing longevity, investment and other risks such as movements in insurer pricing.
“In a very busy market, insurers will always prioritise well-prepared schemes – and that equates to better pricing and lower cost. The more schemes can do to make themselves stand out, the more they can increase competitive tension among insurers – one of the many factors that can lead to better pricing outcomes.”
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