London, 11 December 2024 – UK pension schemes appear more willing to consider their endgame options rather than move automatically to buyout, according to the latest findings from Russell Investments’ UK Defined Benefit Market Insights Study.

While buyout remains the most popular option for schemes, almost one-third (30%) indicate they are yet to decide their endgame target, while the proportion of schemes looking to run on/off has increased by 33% in the last twelve months.

These indications of greater openness to assessing a range of endgame options rather than moving automatically to buyout come at a time as pension schemes report an acceleration in moving towards their endgame goals. 32% of respondents indicate they expect to reach their endgame target within 1-3 years, an increase from 25% compared to Russell Investments’ study in Autumn/Winter 2023, while numbers expecting to reach their target over a longer timeframe saw a slight decline.

Now in its fifth iteration, the Russell Investments’ research series surveyed key stakeholders in the UK defined benefit (DB) market to understand their current views and priorities. Respondents included scheme chief executives, chief investment officers, trustees and pensions managers, with more than half of respondents (53%) responsible for more than £1 billion of assets. Russell Investments also conducted interviews with 11 leading independent trustees to provide additional context to the survey findings.

Key findings from the Russell Investments’ The Changing Ecosystem of Defined Benefit Pensions – Volume 5 include:

• Pension schemes’ priorities are evolving with greater emphasis on increasing levels of return (29%) and cashflow generation (29%) as decision-makers identify a need to get more from their investment portfolios as they consider their endgame options and potentially run-on, either on an interim basis or with a long-term view.
• This trend is particularly pronounced among smaller schemes (those with less than £1 billion of assets), with one-third (33%) of respondents seeing the need to improve levels of return as a priority, an increase of 10% compared to Russell Investments’ previous study. In contrast, larger schemes – operating with a greater range of options available to them – are continuing to prioritise derisking (44%), though it is notable that the overall number of large scheme respondents focused on this area has declined (-6%) from the Spring/Summer iteration of this research.
• Asset allocation focuses have moved back towards fixed income, with a particular focus on investment grade credit where over one-quarter (27%) of respondents expect to increase allocations in the next six months. The proportion of respondents planning to increase allocations to infrastructure has almost doubled (to 11%), potentially reflecting the diversification and income benefits of this asset class, particularly for those schemes considering run on/off either on an interim basis or over the long-term. In contrast, demand for developed and emerging market equities appears to be receding, with just one-tenth (9%) of respondents planning to increase developed market equity holdings and 7% to emerging market equities.
• Property remains the asset class that pension schemes are likely to decrease exposure to, with a reasonable rise (+10% to 43%) in the proportion of current investors seeking to reduce their allocation in the next six months. Private equity and private debt also continue to face challenges relative to other alternatives asset classes, with 32% and 30% respectively of current holders planning to decrease their allocations.
• While still an area of focus, the importance attached to improving sustainability and ESG has fallen sharply with just 34% of respondents identifying this as a current investment priority (compared to 45% in Spring/Summer 2024) as decision-makers seek to address other areas in light of improved funding levels. The quality of data from an ESG perspective remains a concern, with 30% of respondents indicating a desire to see improvements here in the next twelve months.
• Regulation (46%) continues to be seen as the key challenge for DB pension schemes, with a sharp increase (+21%) in the last twelve months in the proportion of respondents identifying this as an area for concern. In contrast, worries over inflation and central bank policies (-10%) have fallen dramatically as levels have normalised relative to recent norms.
• Risk management (57%), depth of expertise (55%) and quality of manager selection (48%) are cited as the key reasons for schemes appointing an outsourced provider.

Commenting on the research findings, Simon Partridge, Head of UK Fiduciary Management at Russell Investments, said:
“Russell Investments is widely recognised as a global leader in the delivery of innovative, bespoke investment solutions that utilise expertise across traditional asset classes and private markets, whether on a standalone basis or as part of a broader holistic capability. I, along with my colleagues, am excited to further develop our business and forge strong relationships with investors in the DACH markets.”

Schemes consider investment requirements as they review long-term options
Many schemes remain undecided about their endgame objective or have determined to pursue the option of run on/off, either over the long-term or on an interim basis as improved funding levels have reduced the pressure to move immediately to buyout. Anecdotally, interviews from the focus group within Russell Investments’ study note exposures to illiquid assets are a determining factor in schemes’ thinking and timeframes, with those still considering buyout as their ultimate endgame option preferring to run-off these assets over time rather than risk the potential for losses by entering the secondary market.

Notably, as a result of this trend, DB asset owners are now considering their medium- to long-term investment strategies and asset allocations as a result, recognising the need to improve levels of return in order to maintain their current positions.

Appetite returns for fixed income assets, while infrastructure also gains greater traction
In something of a reversal of its Spring/Summer 2023 study, Russell Investments’ latest research shows a notable swing back towards fixed income assets. More than one-quarter (27%) of respondents plan to increase exposure to investment grade credit assets, an increase of 4% compared to the previous study, while plans to allocate to government bonds and high yield credit remain relatively stable at 28% and 10% respectively. This growth appears to come primarily at the expense of developed market equities, with just 9% planning to increase allocations to this area in the market in the next six months (compared to 19% in Spring/Summer 2024).

Appetite for infrastructure also appears to be on the rise, with just over one-tenth (11%) of respondents planning to increase exposure in the next six months (compared to just 6% in the Spring/Summer iteration of this study). Anecdotally, respondents indicate particular appetite for open and/or evergreen infrastructure funds that can provide diversification and income benefits, but without the requirement to lock up assets for long periods.

Overall and given the composition of the survey universe, with over half the respondents representing schemes with more than £1 billion of assets, this indicates a continued emphasis on derisking whilst retaining selective exposure to assets with the potential for enhanced returns and cashflow generation.

Notably, as a result of this trend, DB asset owners are now considering their medium- to long-term investment strategies and asset allocations as a result, recognising the need to improve levels of return in order to maintain their current positions.

ESG remains a focus, but not a priority
Improving sustainability and ESG (34%) have continued to fall down the list of priorities among asset owners, with improving or maintaining funding levels (53%), managing market risk (44%) and derisking towards endgame (39%) seen as more pressing considerations among respondents. The study’s focus group noted that schemes’ focus on ESG has reduced in prominence as decision-makers prioritise other areas, but also owing to the limitations of investing in assets – primarily fixed income – perceived as less conducive to pursuing an ESG agenda. However, respondents did highlight growing appreciation for allocations to areas such as infrastructure with these assets seen as being naturally conducive to meeting ESG objectives.

Regulatory pressures continue to raise concerns
Concerns over regulation (46%) continue to be seen as the single biggest challenge for pension schemes. This can be attributed to the pressures being placed on scheme resources, with requirements such as the Pensions Dashboards, SDR and GMP Equalisation highlighted as particular stress points, but also the uncertainty arising from a change in UK government and the potential implications for pension policy. Respondents also noted significant concern arising from the Virgin Media vs. NTL Pension Trustees case which could have much broader implications across the UK pensions landscape.

Simon Partridge added:
“The last two years has seen a rapid evolution within the DB pensions market. While this has been beneficial for many, it has brought with it a number of new, complex considerations that decision-makers have to contend with. They will need to carefully assess their options in order to identify the endgame solution most suited to their scheme, membership and sponsor, balancing the opportunities that improved funding positions can provide against various market, governance and regulatory challenges. The effective use of resource, including outsourced support where required to provide both strategic guidance and operational capabilities, will be critical for schemes to successfully navigate this more complex landscape.”

More information on the Russell Investments’ The Changing Ecosystem of Defined Benefit Pensions – Vol 5 is available here .

 

Media contacts
Matt Rogers, JPES Partners
matt.rogers@jpespartners.com / russellinvestments@jpespartners.com
+44 (0) 207 520 7624 / +44 (0)7801 818735

The Russell Investments UK Defined Benefit Market Insights is based on the responses of 90 UK defined benefit schemes between September and October 2024. Almost half of those surveyed represent schemes with over £1 billion of assets. Respondents included scheme chief executives, CIOs, professional, company- and member-nominated trustees and pension managers. Responses were collected via an online survey conducted by SurveyMonkey, with support from the Pensions and Lifetime Savings Association (PLSA).

To supplement our insights, Russell Investments also undertook detailed interviews with a focus group of eleven senior independent trustees to assess their views on a range of key topics. We would like to thank those individuals interviewed for their time and insights.

Russell Investments is a leading global investment solutions partner providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Since 1936, Russell Investments has been building a legacy of continuous innovation to deliver exceptional value to clients, working every day to improve people’s financial security. Headquartered in Seattle, Washington, Russell Investments has offices worldwide, including Amsterdam, Dubai, London, Mumbai New York, Paris, Shanghai, Sydney, Tokyo, and Toronto.

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