Russell Investments head of UK fiduciary management Simon Partridge
UK pension schemes appear more willing to consider their endgame options rather than move automatically to buyout, latest research from Russell Investments finds.
The fifth iteration of the fiduciary management firm's research – The changing ecosystem of defined benefit (DB) pensions: Volume 5 – surveyed key stakeholders in the DB market to understand their current views and priorities. Respondents included scheme chief executives, chief investment officers, trustees and pensions managers, with some 53% responsible for more than £1bn of assets. In addition, Russell Investments also conducted interviews with 11 independent trustees to provide additional context to the survey findings.
The research found that, 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% over the last 12 months.
It said 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.
The research noted some 32% of respondents indicated they expect to reach their endgame target within one to three years – an increase from 25% compared to Russell Investments' Autumn/Winter 2023 study – while numbers expecting to reach their target over a longer timeframe saw a slight decline.
Commenting on the research findings, Russell Investments head of UK fiduciary management Simon Partridge said: "The most interesting finding for me was that nearly a third of schemes are still to decide on their endgame targets. That is down from the last report, where we had about 37% still to decide, but, still, nearly a third of schemes haven't yet decided where they want to get to.
"Alongside that there has been an increase in those who are now actively looking at a run-off or a run-on type of solution – that's up to 28% from 21% last year."
Partridge added that "while buyout will inevitably remain the solution for many", particularly those schemes at the smaller end of the spectrum, he was beginning to see a "greater openness among schemes to explore the range of options open to them".
Other key findings from the study included:
- 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 £1bn 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%).
- Asset allocation focuses have moved back towards fixed income, particularly 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%). 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 (an increase of ten percentage points 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 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). The quality of data from an ESG perspective also remains a concern, with 30% of respondents indicating a desire to see improvements here in the next 12 months.
- Regulation (46%) continues to be seen as the key challenge for DB pension schemes, with a sharp increase (+21 percentage points) in the last 12 months in the proportion of respondents identifying this as an area for concern. In contrast, worries over inflation and central bank policies (-ten percentage points) 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.
Partridge said there were two aspects of the report that particularly surprised him.
The first was around responsible investing – an area which he said remained a focus for a large proportion of schemes but not necessarily a priority over the next 12 months.
He said: "While it remains relatively high on the agenda, reducing the climate change risk in portfolios is not a top priority for schemes."
Partridge explained there were a number of reasons for that – notably that many schemes, particularly the larger ones, will have already looked at some of the key issues, such as TCFD reporting already.
He explained: "It is still something they are concerned about, but it feels there are other aspects that require them to spend more time on."
Partridge added: "As pension schemes are de risking, there's also a perception that there's less they can do with regards to climate change, decarbonisation or climate solutions.
"I think that's more of a perception and it is not necessarily true – and there are all sorts of ways to incorporate decarbonisation solutions into fixed income mandates."
In addition to this, Partridge said the focus of schemes seemed to have shifted towards increased accountability, particularly when it came to outsourcing.
He said: "They're moving away from the traditional reasons for outsourcing – access to more sophisticated asset classes, more diversification and so-on – to focussing more around leverage management, collateral management, risk management and all the infrastructure around how to run a pension scheme and build a much more robust governance structure."
"It is still important to have diversification and everything else. But I think the focus has shifted, particularly in a de-risking world, into accountability. Who is responsible for each of the various aspects of running this pension scheme, who is accountable for all those things, so that we can really make sure that all those risks are locked down?"
Partridge concluded: "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."
Read Russell Investments' research – The changing ecosystem of defined benefit (DB) pensions: Volume 5 – in full here.
