Investment approach 'key' to endgame planning as schemes increasingly aim for buyout

An increasing number of schemes are focusing on their investment approach in a bid to be ‘settlement ready’, suggesting that this is increasingly key to endgame plans and can offer several advantages when approaching the market, Aon has stated.

Aon’s recent Global Pensions Risk Survey 2021/22 showed that more defined benefit (DB) schemes were opting for buyout as their long-term target, with trustees “ever more aware” that they need to take steps to prepare, such as data cleansing or agreeing their governance structure.

In addition to this, the firm suggested that pension schemes were increasingly seeing the benefit of taking the same approach with their assets, and investing with the endgame of buyout in mind and starting the preparation as early as possible.

Indeed, Aon’s risk settlement team said that early investment preparation offers schemes several advantages, including avoiding roadblocks such as long-dated illiquid assets, matching insurer pricing more effectively by allocating more to assets such as gilts swaps and credits, and reducing exposure to assets insurers do not want.

Adding to this, Aon partner, Lucy Barron, stressed that trustees need to think about the most efficient investment strategy, "whatever the timeframe they have in mind for reaching their scheme’s endgame".

Barron explained that there are several investment options to consider that give schemes the best opportunities, including, for instance, ensuring liabilities are fully protected against movements in interest rates and inflation.

She continued: “There are good reasons for taking this more holistic approach to reaching a scheme’s endgame. The ultimate aim is for the scheme to get to buyout with reduced risk and more certainty.

"That involves thinking about managing longevity, investment and other risks such as movements in insurer pricing. In a very busy market, insurers will always prioritise well-prepared schemes – and that equates to better pricing and lower cost.

“The more schemes can do to make themselves stand out, the more they can increase competitive tension among insurers - one of the many factors that can lead to better pricing outcomes."

In addition to this, Barron warned that it is clear that this is now a more mature market, with schemes having a greater understanding of what is needed to get them to market.

"As advisers, we can help create a journey plan to buyout, which takes into consideration investment and longevity risks, including the use of buy-ins at the right time," she continued.

“But there is no substitute for market knowledge, so an understanding of insurer investment strategies allows schemes to make better decisions, either by having their investments aligned with those of insurers ahead of reaching full buyout funding, or by managing themselves out of illiquid assets with the least risk and cost.”

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