2023 has proven another healthy year for the UK’s defined benefit (DB) pension schemes. The latest figures from the Pension Protection Fund (PPF) report an overall funding ratio for the index is still 145.7 per cent, up from 133.7 per cent this time last year, which while mostly attributable to rising gilt yields, still gives trustees more room to manoeuvre than they have had for years in terms of planning their endgames.
For many their sights are set on buyout, with insurance companies recording bumper transactions this year as DB plans took advantage of the favourable market conditions to transfer liabilities to a third-party.
Rhian Littlewood, Senior Business Development Manager at Standard Life, part of Phoenix Group, says: “As final transactions close for 2023, it’s been another successful year for the pension risk transfer market, with record volumes as schemes locked in catapulted funding levels. Looking ahead, there are no signs that activity levels will be slowing down, with enquiries picking up pace for 2024 transactions as schemes look to put themselves on providers’ radars.”
Yet some asset managers believe that moving to buyout may be presumptive and that some schemes could benefit from maintaining control of their investments in growth assets which could bolster surpluses still further.
Serkan Bektas, Head of Client Solutions at Insight Investment, says: “[DB schemes] are healthier than they have ever been, and they have greater choices and options as a result. While the primary objective of protecting members remains, they may be able to find ways where corporate sponsors, that have backed these schemes for decades, gain access to some of that upside.”
Bektas explains that where pension plans are 120 per cent to 130 per cent funded, trustees should back liabilities through high investment grade contractual assets, then put the surplus to work in a broad range of growth instruments.
Looking in more detail at the most appropriate assets for DB schemes looking to run on their schemes, April LaRusse, Head of Investment Specialists at Insight Investment, says: “Investment grade credit is yielding close to 6 per cent and we haven’t seen those levels since 2009. It is an attractive time for clients to be derisking into a contractual asset.”
LaRusse continues: “There has been a definite shift to wanting to talk more about maturing bond portfolios and clients are looking at global opportunities rather than focusing on primarily UK. This reflects a recognition that if you’re choosing an investment grade UK corporate bond strategy you only have about 350 issuers to look at, whereas if you look globally, just in the corporate world, you end up with 2400 issuers to choose from.”
However, looking outside of those DB schemes fortunate enough to have taken advantage of rising gilt yields, there are fears that the recent reversal in fortune where liabilities are starting to increase, unhedged plans could be left vulnerable.
Vishal Makkar, Head of Retirement Consulting at Buck, says:“Many schemes will be evaluating their endgame options next year, having already taken investment risk off the table and closely hedged assets and liabilities. We’re anticipating these schemes to largely maintain healthy funding positions in the new year.
He concludes: “Where schemes have not fully hedged interest rate risks, the recent decline in bond yields, and potential for future central bank rate cuts, could trigger funding challenges as liability values begin to increase on lower yields. These schemes may be more reliant on good performance from growth assets or the support of their sponsor to improve their funding position.”
