Nearly all DB schemes to consider realigning investment strategies after 'challenging' year

The vast majority (95.7 per cent) of defined benefit (DB) pension scheme trustees believe they need to consider re-aligning their investment strategy to achieve long-term funding objectives, with 91.5 per cent prioritising this for 2021, industry research has found.

The survey, commissioned by the Pensions Management Institute (PMI) and River and Mercantile, also found that a further 85.1 per cent of DB trustees plan to reassess whether their investment portfolio is delivering an appropriate level of return.

This reassessment was viewed as a priority for the coming year by more than three-quarters (79.8 per cent) of trustees.

The survey also highlighted concerns that schemes' existing strategies are not achieving their objectives to an "adequate extent".

In particular, it found that nearly three-quarters (71.3 per cent) of trustees thought that without selling growth assets, they were likely to become increasingly reliant on deficit contributions to meet pensions cashflow or invest in income-generating assets, with 68.1 per cent highlighting this as a priority for 2021.

River and Mercantile co-head of solutions, Ajeet Manjrekar, commented: "After a challenging 2020 for trustees and sponsors, it is clear schemes' investment strategies today need to target the right level of return to drive long-term funding success.

“While endgames differ, many schemes have taken a step back from the funding progress of previous years, with 2020 being a lost year for some schemes. This is now a significant issue as schemes are getting more mature and paying out increasing amounts in pension payments.

"Trustees are clearly mindful of the challenges and most respondents stressed the importance of re-aligning their investment strategy to meet their long-term funding goal.

“The starting point here is to reassess the target investment return from the assets as well as the risks ahead. It is encouraging to see that four in five trustees consider this is a priority for the year ahead given recent market movements.

“With many factors to take into account in today's uncertain world, it is critical that trustees are able to design the optimal investment strategy in order to achieve their long-term funding objective whilst explicitly addressing the risk of being blown off course."

The research forms part of a wider initiative, which will also see the creation of a fiduciary management research group made up of industry representatives and chaired by River and Mercantile.

Commenting on the research, PMI head of technical, Tim Middleton, added: “While the New Year typically brings a renewed sense of optimism, it seems that 2021 could be as much of a challenge for trustees and pension schemes to navigate as last year.

“Against this backdrop the formation of the fiduciary management research group, which will explore the key emerging themes, market developments, and how trustees can mitigate the challenges now and for the near, medium, and long-term, does provide some hope for a brighter outlook.

“The PMI remains committed to the ongoing development and improvement of the pensions sector in the UK and through this new initiative will be organising quarterly meetings to explore other topics that warrant further study and research as agreed by the group.”

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