Funding targets shift 'dramatically' as DB trustees look to buyout

Funding targets have changed "dramatically" since 2021, research from Charles Stanley Fiduciary Management has suggested, with the number of defined benefit (DB) pension scheme trustees targeting buyout on the rise even prior to recent market volatility.

The survey found that more than one third (34 per cent) of DB pension scheme trustees said that their scheme was targeting buyout, compared to 19 per cent in 2021, while 71 per cent of those who are opting for buyout expect to hit their target within 10 years.

As the survey was undertaken prior to the recent gilt market volatility, the firm noted that "even more" DB schemes may have since set their sights on buyout, with the recent turbulence expected to have made the prospect of buyout more realistic for many.

However, the research also found that there is a disconnect between expectation and long-term planning, as three quarters (76 per cent) of professional trustees are yet to set a long-term funding target at all, the same as 2021.

In light of the lack of progress in this area, Charles Stanley Fiduciary Management suggested that trustees have “evidently continued a ‘wait-and-see’ approach until there are concrete proposals from the regulator”, with the new DB funding code not yet finalised.

Self-sufficiency has become a less popular option for trustees, meanwhile, with just under two fifths (39 per cent) of trustees stating that their long-term funding target is going or likely to be self-sufficiency, down from 51 per cent in 2021.

In contrast, interest in superfund consolidation had remained relatively steady, as 27 per cent said superfund consolidation is their long-term funding target, broadly in line with the 26 per cent in 2021.

However, Charles Stanley Fiduciary Management argued that this lack of change is surprising, pointing out that despite superfunds now being a feasible option following the successful assessment of Clara Pensions, there remains a lack of confidence among trustees.

There were improvements in some areas though, as 57 per cent of trustees said that they expect to set their long-term funding targets in the next 12 months, up from 47 per cent last year.

Furthermore, despite volatile markets throughout 2022, confidence is high among trustees, with 71 per cent stating that they are confident their scheme will achieve its long-term funding target objective, increasing to 100 per cent amongst those with a set funding target.

Commenting on the findings, Charles Stanley Fiduciary Management senior portfolio manager, Bob Campion, stated: “The last few weeks have thrown a huge amount of uncertainty at pension scheme trustees, with dramatic volatility in the gilt market having a seismic impact on scheme funding.

"This follows a record year for buyout deals in 2021, and a massive drop in buyout prices due to rising gilt yields in the run up to summer 2022.

“It’s no wonder that some trustees had already moved their goalposts towards buyout. Now, with many schemes benefiting from recent events, I’m sure more are planning to do so.

"Buyout is currently a cheaper, more viable, route to endgame than it has been for years, and the gradual emergence of superfunds will keep the pressure on insurers to keep their prices affordable.

“For any pension fund that anticipates buying out within a reasonable timeframe we would encourage the trustee to consider adopting buyout as the target for their investment strategy.”

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