New research finds DB pension schemes accelerating push towards derisking to endgame following UK mini-budget

London, 28 November 2022 — The UK Government’s mini-budget statement has impacted defined benefit (DB) stakeholder priorities with a significant increase in focus on derisking towards endgame, according to a major new study by Russell Investments.

Prior to the government announcement, trustees and sponsors were primarily focused on improving funding levels (68%), managing risks (61%) and ESG (43%). However, since the mini-budget announcement, the focus on derisking towards endgame became more prominent with more than half of respondents ranking it as their main investment priority compared to a third pre-mini-budget – a stark increase of 20%. Improvements to funding levels and managing risks fell back by 10% and 5%, respectively, in terms of priority.

The findings form part of a major study by Russell Investments – UK Defined Benefit Market Insights – a new biannual series surveying senior stakeholders in the UK DB market to understand their current views and priorities.

Key findings from Russell Investments’ The Changing Ecosystem of Defined Benefit Pensions include:

  • Inflation and central bank policy action are critical issues for pension trustees and sponsors, with 74% of respondents ranking these as their main concern in the next six months. These concerns ranked higher (13% increase) among respondents following the UK mini-budget, compared to those surveyed beforehand. The majority of respondents also cited significant fears over the prospect of recession and current geopolitical dynamics and their impact.
  • More than half of respondents expect to retain their current liability hedge ratios over the next two years, while just over a quarter expect to increase hedging. The proportion of respondents planning to increase liability hedge ratios has fallen 20% following the UK government statement, potentially reflecting the expected lower use of leverage going forwards.
  • Two-thirds of respondents are ‘likely’ or ‘very likely’ to increase their focus on climate change over the next 12 months, while over a third have already set a net-zero target of 2050 or earlier.
  • Of those respondents currently using an outsourced investment provider, the majority identified a greater depth of expertise, improved reporting and transparency, and the application of strong governance structures as the top three reasons for utilising such support.

The Russell Investments study surveyed 76 UK DB pension schemes between August and October 2022, with respondents (including scheme chief executives, CIOs, trustees and pensions managers) responsible for over £100 billion of assets under management. Over three-quarters of respondents were responsible for more than £100 million of assets. Russell Investments also conducted interviews with a number of senior decision-makers to provide additional context to the survey findings.

Commenting on the findings, Simon Partridge, Head of Fiduciary Management Solutions at Russell Investments, said:

“Rapid rises in interest rates, as central banks have sought to combat high inflation levels, have had a significant impact on funding levels and have left DB pension schemes in a much different position to that which they might have expected 12 months ago. This is leading many to revisit their long-term objectives and also review their decision-making structures and approaches. These discussions have been given renewed impetus by the volatility following the UK Government’s mini-budget statement in September, encouraging a greater focus on outsourcing.”

The study found this focus on de-risking towards endgame is being reflected in asset allocation decisions, with moves away from developed markets (32% of respondents) and emerging markets equities (12%), as well as property (17%) exposure. Investment grade credit (25%) and high yield credit (13%) appear to be beneficiaries of this trend, as do infrastructure (16%) and private credit (12%) reflecting the perceived attractiveness of the risk/return opportunities available in these asset classes.

Increased focus on climate change

DB scheme decision-makers appear increasingly focused on addressing issues relating to climate change, with over two-thirds of respondents (68%) indicating they were ‘likely’ or ‘very likely’ to increase their focus on climate change-related issues in the next 12 months. This is being applied through the use of scenario analysis to consider climate change risks, as well as discussing policies in this area with advisers and underlying managers.

Climate change also features prominently as a criterion in manager selection, with more than half of respondents (57%) highlighting manager research as a means by which they incorporate sustainability considerations into their investment portfolios. Only a quarter (26%) use explicit exclusion policies to meet their climate change goals. Sustainability is being incorporated across entire portfolios by three-quarters of schemes (76%) rather than simply through specific allocations (20%) or by using single asset classes (9%).

The increasing importance of climate change to DB pension scheme stakeholders is also evident in their focus on setting net-zero targets. 36% of respondents have already set a target of 2050 or earlier, 47% are in the process of considering their approach while only 16% have decided not to set any target.

Use of outsourced investment capabilities

Greater expertise (55%), improved reporting and transparency (55%) and the application of strong governance structures (52%) were identified as the key reasons for DB schemes employing outsourced investment support, reflecting a clear preference towards improving decision-making and accountability.

Regulatory demands were cited by a number of respondents as a key consideration, with respondents from smaller DB schemes in particular noting the extent to which regulatory volume was becoming a concern and the need to ensure good governance structures are in place.

Jim Leggate, Head of UK Institutional, Middle East and Africa at Russell Investments, added:

“The UK defined benefit market has clearly been challenged over the last year, with increased uncertainty and market volatility adding to concerns over slowing growth, recession and climate change. Trustees and sponsors are responding to these challenges through changes to their strategic plans and asset allocations, as well as the deployment of outsourced support to strengthen decision-making and governance practices. We expect this trend to continue as schemes seek external expertise to meet their long-term goals.”

More information on Russell Investments’ The Changing Ecosystem of Defined Benefit Pensions is available here.

Media Contacts:
Stephanie Ramos, Russell Investments
+44 (0) 207 02 46 446

Lodovico Sanseverino, JPES Partners
+44 (0) 207 520 7620
+44 (0)7970 747 928

Survey methodology

The Russell Investments UK Defined Benefit Market Insights is based on the online responses of 76 UK defined benefit schemes between August and October 2022, with approximately 40% of responses received before the UK Government’s mini-budget at the end of September. Schemes responding to the study range in size from less than £10 million to more than £5 billion in assets. Respondents included scheme chief executives, CIOs, trustees and pensions managers. Responses were collected via an online survey conducted using SurveyMonkey.

To supplement our insights, Russell Investments also undertook detailed interviews with senior decision-makers at seven leading corporate and local authority pension schemes to assess their views on a range of key topics. We would like to thank those individuals interviewed for their time and insights.

About Russell Investments

Russell Investments is a leading global investment solutions firm providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 86-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve the financial security of its clients. The firm has £246 billion (or $274 billion, or €280 billion) in assets under management for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including in New York, London, Toronto, Tokyo, and Shanghai (all figures as of 30/09/2022).

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