Inflation and central bank policy action top concern for DB schemes

Nearly three quarters (74 per cent) of defined benefit (DB) pension scheme trustees and sponsors cited inflation and central bank policy action as their main concern in the next six months, research from Russell Investments has revealed.

The report, The Changing Ecosystem of DB Pensions, showed that these concerns have been on the rise following the government's mini-Budget, with only 68 per cent of respondents identifying inflation and central bank policy action as their main concern prior to the government announcement.

The majority of respondents also cited significant fears over the prospect of recession and current geopolitical dynamics and their impact, with 52 per cent citing concerns of a recession following the mini-Budget, while 50 per cent had concerns over geopolitical conflict.

The research suggested that DB trustees' priorities have shifted following the mini-Budget, revealing that, prior to the government announcement, trustees and sponsors were primarily focused on improving funding levels, with 68 per cent citing this as their main concern, while 61 per cent highlighted risk management as their main priority.

Since the mini-Budget however, the focus on de-risking has become more prominent, with more than half (52 per cent) of respondents ranking it as their main investment priority, compared to 32 per cent pre-mini-Budget.

Improvements to funding levels and managing risks, meanwhile, fell back by 10 per cent and 5 per cent, respectively, in terms of priority.

The focus on de-risking has also been reflected in asset allocation decisions, as the research revealed that 32 per cent of respondents have moved away from developed markets, while 12 per cent have shifted from emerging markets equities, and 17 per cent have moved away from property exposure.

Investment grade credit (25 per cent) and high yield credit (13 per cent) appeared to be beneficiaries of this trend, alongside infrastructure (16 per cent) and private credit (12 per cent).

Following on from recent issues around liability driven investment (LDI), more than half of respondents confirmed that they expect to retain their current liability hedge ratios over the next two years, while just over a quarter expect to increase hedging.

However, the proportion of respondents planning to increase liability hedge ratios has fallen 20 per cent following the mini-Budget statement, which Russell Investments highlighted as a potential reflection of the expected lower use of leverage going forwards.

More broadly, the report found that climate remained a key consideration, as over two-thirds (68 per cent) of respondents said they were ‘likely’ or ‘very likely’ to increase their focus on climate change over the next 12 months.

In addition to this, over a third (36 per cent) have already set a net-zero target of 2050 or earlier and 47 per cent are in the process of considering their approach, while only 16 per cent have decided not to set any target.

Climate change also features prominently as a criterion in manager selection, with more than half (57 per cent) of those surveyed highlighting manager research as a means by which they incorporate sustainability considerations into their investment portfolios.

Commenting on the findings, Russell Investments head of UK institutional, Middle East and Africa, Jim Leggate, stated: “The UK DB 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.”

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