Pension schemes warned they could be overestimating timescale to endgame

Pension schemes in the UK could be overestimating how long it will take to reach their endgame and miss opportunities as a result, according to Aon.

The firm’s Journey to Settlement report found that 77 per cent of schemes were over 80 per cent funded on their endgame target, but only 26 per cent felt that they would reach their endgame in less than five years.

Trustees were urged to act now to ensure they are fully prepared to take their next step and avoid missing opportunities by delaying action.

The survey of 120 schemes found that 34 per cent were targeting buyout, a percentage that is “consistently increasing” as funding positions improve, according to Aon.

"The good news is that 77 per cent of schemes are now over 80 per cent funded on their endgame target," commented Aon Risk Settlement Group associate partner, Michael Walker.

"However, at the moment, only 26 per cent of schemes expect to reach their endgame in less than five years.

“In our experience, we believe schemes may be overestimating how long it will take to reach that target. We can understand why they might think that’s the case, but cautious forecasts can heighten the risk of missing opportunities along the journey.
“The story of the last few years is that the time taken to reach endgame targets is invariably less than expected. Therefore, trustees and sponsors need to ensure that they are fully prepared to take their next step when the opportunity arises.”

Aon’s research also found that less than a third (29 per cent) of pension schemes were statistically assessing their longevity risk, with the firm warning that robust analysis is required to understand potential volatility in journey plans, reduce the risk of derailments and facilitate optimal hedging decisions.

Nearly a third (32 per cent) of schemes were assessing their investment performance relative to their low risk measure or buyout cost, rather than their technical provisions, although Aon said it was seeing an accelerated move towards benchmarking against the endgame target as funding positions improve.

Two in five schemes believed they had reliable data and 54 per cent were considering aligning data cleanse policies, which Aon said resulted in cost efficiencies and improved settlement readiness.

“Phased buy-ins will be used as a risk management tool by many pension schemes, with the majority understanding the resulting impact on their investment strategy,” the report noted.

Member support was found to be more commonplace, with around 75 per cent of schemes at least ‘somewhat likely’ to provide support for members’ retirement decision making.

Walker continued: “Pension schemes are now almost certainly better placed in relation to their endgame than they might have expected even as few as five years ago. But they need to maintain a proactive approach to make the most of the situation.

“For example, it’s good to see that phased buy-ins are being used as a risk management tool by many schemes, with the majority also taking the time to understand how these transactions would impact their investment strategy.
“Similarly, it’s encouraging that support for ‘at retirement’ initiatives is both widespread and increasing. It’s just one way that schemes can deliver greater flexibility to members while simultaneously reducing risk. But the bottom line is that it’s essential for trustees and sponsors to prepare a clear strategic plan upfront. It will help them to deliver a smoother and more cost-effective journey to where they want to reach and to be ‘transaction ready’ when the moment – and pricing – arises.”

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