Pension scheme trustees have been encouraged to take action in the face of market reaction following the mini-Budget, with industry experts raising queries over the potential impact on the bulk annuity market and corporate sponsors.

Ross Trustees trustee director, Pavan Bhardwaj, said that trustees should consider re-assessing progress towards long-term objectives and consider whether any de-risking is warranted.

Bhardwaj noted that asset allocations will “likely” have moved away from strategic targets and trustees should consider whether some rebalancing is warranted to bring growth/matching splits back towards target.

This advice came in response to “the large increase in government borrowing required to finance the measures” announced in the mini-Budget, which caused “major gyrations” in financial markets, with an "unprecedented" surge in gilt yields.

Bhardwaj also explained that schemes have already been required to recapitalise LDI portfolios, due to the higher yields, suggesting that "liquidity is therefore the key concern going forward".

"Schemes with high allocations to illiquids could potentially be required to take a haircut on these assets or, in extremis, reduce the target level of hedging," he added.

Standard Life senior business development manager, Matt Richards, also pointed out that gilt yields, alongside other factors, have increased funding positions for some schemes, suggesting that these improved funding positions have "made insurance more affordable and the possibility of buy-out seem closer than in previous years".

"We expect trustees will be weighing up whether to take advantage of these favourable market conditions and lock-in some of the most competitive pricing in years to ensure security for their members," he continued.

“While it is not clear how long this window of opportunity will last, sponsors and trustees are likely to want to act now while funding levels are high.

"This is likely to increase demand in the bulk purchase annuity market during what has already been an active year to date for the sector with around £12bn of transactions in the first six months.”

There are also sponsoring employer concerns that trustees should be mindful of, as LCP has reiterated recent warnings over the potential impact of rising interest rates on corporate sponsors, warning that some firms might not survive without some form of restructuring.

LCP partner, Helen Abbott, commented: “Rising borrowing costs are bad news for corporate Britain, but the impact on individual firms will vary considerably.

"For some sponsors of company pension schemes, these increased costs come off the back of other costs pressures as well as debts arising from the Pandemic. Increased debt servicing costs could be the final straw.

"For other firms, the impact may be less immediate, especially if some of their financing is via corporate bonds which will only need refinancing on a gradual basis. For many businesses it will be the attitude of the banks which are key.

"Trustees need to stay close to their sponsors during these turbulent times and make sure they have a thorough understanding of how the rising cost of servicing debt will impact the strength of the employer covenant”.

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