Over two in five UK pension schemes say they are targeting an insurance buy-out as their endgame solution, up from just over a third (35%) a year ago, according to the latest research from Janus Henderson and mallowstreet. For schemes under £1 billion, this figure rises to over half (56%), illustrating how risk transfer is the preferred solution to managing complexity for UK pension schemes. 

 

Janus Henderson and mallowstreet surveyed over 160 trustees and pensions professionals, a third of whom were Chairs of Trustees, to understand the major risks and concerns facing the Trustees in 2023. Now in its second year, the study canvasses the views of a representative sample of pension schemes to analyse the latest regulatory challenges, as well as key areas where the pensions industry can better support Trustees. 

 

The report findings come despite the fact the new pensions DB funding code will make low dependency strategies the default long-term funding goal for DB schemes. The report also finds that 79% of schemes are over 90% funded, irrespective of whether their endgame is buy-out or low dependency. More importantly, buy-outs are becoming increasingly popular among schemes with weaker sponsors, which shows the significant role they play in responding to regulatory pressures.

Download the report now.

 

Anil Shenoy, Head of UK Institutional at Janus Henderson Investors, said: “The insurance buyout is becoming more popular as an endgame strategy and this trend is likely to continue following the improvement seen in many schemes’ funding positions over recent months. However, the repricing of liquid corporate bond markets means more opportunities to construct a low dependency portfolio which can be useful if schemes need time to get “buyout ready” or if there are capacity constraints in the insurance market.”    

 

Increased regulatory complexity, greater legal responsibilities and a lack of clarity around the ESG impact on risk/return profiles are additional key challenges pensions professionals see facing the industry this year. These include the following: 

 

i.     Regulatory pressure and legal responsibilities are rising: 82% of UK trustees find the growing regulatory complexity of pensions challenging. Only a third of all pensions professionals are satisfied with the new single code of practice and DB funding code, and satisfaction with ESG requirements has dropped from 48% in 2021 to 35% in 2022. Cost concerns are also more in focus: 29% of all schemes say setting performance and value for money objectives for providers is the second most important scheme area for improvement, up 15% YOY. 

ii.     ESG impact needs further clarification to achieve successful implementation: Despite improvements in training and understanding, just 6% of UK schemes perceive environmental, climate and social risks as the most material risks to their ability to pay pension benefits. The added operational costs of ESG implementation, including time and resources, remains the top challenge for 57% of schemes, an increase of 9% YOY.  53% of pensions professionals say there is insufficient reporting from investee companies themselves, leaving half of all schemes exposed to the persistent challenge of greenwashing.

iii.     Member communications need to unlock engagement: Two-thirds of DC schemes in the UK say increasing member engagement is among their top challenges. Half of DC schemes say this is a key area for improvement, with 86% planning to use more inclusive language in their member communications.

iv.     Inadequate savings and insufficient contributions in DC schemes: The report highlights that member engagement and consolidation in DC pensions do not offer a fix for inadequate savings and insufficient DC contributions. Over half (53%) of DC schemes say that increasing the minimum auto-enrolment (AE) contributions would have the biggest impact on DC pension outcomes – up from 36% in 2021. Doubts over DC value for money are growing, as investment risks and members’ needs are not accounted for properly, so the DC industry must take more steps improve retirement security.

 

v.     Covenant risk is monitored but not managed: Most schemes (70%) have information-sharing protocols in place but their visibility over the strength of the sponsor covenant is often mismatched with their endgame journey. Despite this, just 14% are worried about covenant risk affecting future pensions, and only 34% look for guarantees and security over assets to mitigate covenant risk – and this often happens when there is risk to the covenant already.

 

 

mallowstreet surveyed over 160 trustees and pensions professionals in Q4 2022 – in partnership with Janus Henderson Investors and in association with the Pensions Management Institute, the Association of Member Nominated Trustees, the Association of Professional Pension Trustees and the Pensions and Lifetime Savings Association. The goal was to understand the challenges the industry faces and identify ways in which managers can support them better, especially when it comes to regulatory change, ESG requirements and covenant management.