Majority of UK pension schemes expected to target lower returns for longer to reach their end-games
Most UK pension schemes are expected to have lower for longer return objectives ahead of reaching their end-game, the annual survey by the Pensions Management Institute, in association with Schroders Solutions, has today found.
Over two-thirds (67%) of respondents felt schemes have adjusted their return expectations, amid an environment of higher funding levels, greater regulatory guidance and increased investment uncertainty, according to the ‘Navigating the key issues facing schemes’ survey.
A little over half (52%) stated that they would reassess their investment governance model as they approached end game. Schemes cited Guaranteed Minimum Pension Equalisation, insurer capacity constraints and data quality among the major hurdles for achieving a buyout.
Ronan O’Riordan, Head of UK Institutional Business Development, Schroders, said:
“For many trustees, the pensions landscape has become increasingly complex, either because of regulatory changes, growing ESG requirements or the challenging investment landscape.
“The work of the PMI’s Fiduciary Management (FM) Strategic Forum is very valuable in allowing for the exchange of ideas and perspectives across a broad range of market participants helping us to be better informed to the benefit of our clients. The research released today is the culmination of these discussions for wider benefit.”
The PMI’s FM Strategic Forum was created in partnership with Schroders Solutions and the PMI. This group represents many of the third party evaluation firms involved in the FM market, along with senior independent trustees. Its focus is on discussing the key issues affecting pension schemes across all governance models and sizes and its findings have informed the topics of this year’s survey.
Tim Middleton, Director of Policy and External Affairs at the PMI, said:
“This third report continues the excellent work of its predecessors by investigating the key areas of concern to pension scheme trustees at the beginning of 2023. Drawing on the experience of 130 respondents, this survey highlights the principal issues that UK pension schemes will have to address this year. Following a year characterised by the Cost of Living Crisis, war in Ukraine, the Autumn gilts crisis and the aftermath of the brief premiership of Liz Truss, the economic environment presents particular challenges for trustees in pursuit of the Nirvana of buyout. This report is an excellent summary of the obstacles to effective stewardship of scheme assets and will be vital reading for anyone with an interest in scheme governance.”
The survey also identified several ESG challenges. In particular, schemes with assets under £1 billion are heavily reliant on their asset managers and investment consultants to meet the growing array of ESG requirements. Over three-quarters (76%) of trustees of smaller schemes needed extra support in order to comply with sustainability obligations. Some 38% of trustees on schemes greater than £1 billion shared this view, highlighting how this challenge is affecting schemes of all sizes.
In contrast, just 17% of schemes larger than £1 billion said they had a dedicated in-house team responsible for meeting the ESG requirements imposed by regulation and best practice. This fell to 4% of smaller schemes.
The findings come shortly after legislation from the UK’s Department for Work and Pensions required schemes of over £1bn in assets to publish their climate risk disclosures by October 2022.
Less than a fifth (17%) of schemes said that, although they had a set of stewardship priorities, they did not have a good understanding of their managers’ policies or the actions they take. In addition, only 20% said that they regularly engaged with their managers to ensure their stewardship priorities were in alignment.
Following shortly after the UK’s market stresses in late 2022, one-third of trustees said that, while their investment governance model provided necessary support, there was still room for improvement. Almost half (48%) said they would review the operational aspects of their investment strategies, such as dealing frequencies and settlement periods.
Looking ahead, coming out of the recent period of market stress, trustees said their major priority for their Liability Driven Investment strategies was increased reporting on leverage and liquidity.
This annual survey analysed the views of 130 UK pensions scheme trustees via an online survey during Q4 2022.
To read the findings in full detail, please click here.