The Risks of Conservative Investment Strategies in UK DB Schemes
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In the face of evolving market dynamics, many UK defined benefit (DB) schemes are choosing conservative investment strategies that minimise exposure to illiquid assets and liquid alternatives. This trend, uncovered in a survey by mallowstreet in partnership with Aon which included 54 UK defined benefit (DB) schemes with combined assets under management over £400bn, raises questions about the long-term implications for funding levels and returns.
De-risking continues despite interest rate improvements
Improved funding levels and a changing financial environment mean many DB schemes continue along a de-risking trajectory. Over the past 12 months, nearly two in five schemes have increased their liability-driven investment (LDI) holdings, while a third have added to investment-grade credit. Conversely, 48% have reduced allocations to illiquid assets like real estate and infrastructure, and 24% have decreased return-generating credit.
Ally Georgieva, Head of Insight at mallowstreet, says:
“This cautious approach persists even though most schemes face no major barriers to adopting new investment strategies or managers. The reluctance to explore return-generating assets, despite favourable interest rate changes, reflects a diminished risk appetite that could hinder long-term resilience.”
Returns are still in focus to increase funding levels and stability
While some DB schemes have reached full funding, the need for returns remains pressing for others. About 40% will prioritise returns over the next few years to either achieve or maintain full funding. The further reduction in illiquid and return-generating assets for 46% of schemes is particularly concerning, given the role these investments can play in achieving stable, long-term performance. Liquidity itself does not appear to be the main concern, as 57% of DB schemes also avoid liquid alternatives.
Striking a careful balance between risk and return
For schemes planning to run on or with undecided endgames, a modest return above gilts could prove invaluable. These returns not only hedge against future risks but also help sustain funding levels in a landscape where liquidity and diversification are increasingly essential.
Shelley Fryer, Associate Partner at Aon says
“While it is sensible that DB schemes are looking to lock-in the funding gains they have seen, de-risking too far can increase the chance of a scheme returning to deficit. Within our Zone framework, a key focus for those in the Protection Zone is agreeing the investment strategy needed to gradually build up an appropriate funding level buffer. This protects against unexpected shocks and means true surplus can be identified”.
For more information visit aon.com/investment
