UK Mini Budget accelerates de-risking of DB schemes, says Russell Investments | News

The UK government’s September mini-budget statement affected the priorities of defined benefit (DB) stakeholders, with a significant increase in focus on de-risking towards the end game, according to recent research from Russell Investments.

Prior to the government’s announcement, plan trustees and sponsors were primarily focused on improving funding levels (68%), risk management (61%) and ESG (43%). However, since the mini-budget announcement, the focus on reducing risk towards the end game has become more prominent, with more than half of respondents ranking it as their top investment priority, compared to a third pre-mini-budget – a strong growth of 20%.

Improvements in funding levels and risk management fell by 10% and 5% respectively in terms of priority, the research shows.

The findings form part of a major study by Russell Investments – The Changing Ecosystem of Defined Benefit Pensions – a new bi-annual series surveying senior stakeholders in the UK DB market to understand their current views and priorities.

The survey found that inflation and central bank policy action are critical issues for pension administrators and sponsors, with 74% of respondents citing these as their main concern over the next six months.

These concerns ranked higher (up 13%) among respondents after the UK mini-budget compared to those surveyed previously. Most respondents also mentioned significant fears about the prospect of recession and current geopolitical dynamics and their impact.

Simon Partridge, head of fiduciary management solutions at Russell Investments, said: “Rapid rises in interest rates as central banks sought to combat high levels of inflation had a significant impact on funding levels and left DB pension schemes in a much different way. position to what would have been expected 12 months ago.”

He added: “This is causing many to review their long-term goals and also review their decision-making structures and approaches. These talks have been given renewed impetus by the volatility following the UK government’s mini-budget statement in September, encouraging a greater focus on outsourcing.”

Asset allocation decisions

The study found that this focus on de-risking towards the end game is reflected in asset allocation decisions, with a move away from developed markets (32% of respondents) and emerging market stocks (12%), as well as property exposure (17%) .

Simon Partridge

Investment credit (25%) and high yield credit (13%) appear to be beneficiaries of this trend, as do infrastructure (16%) and private credit (12%), reflecting the perceived attractiveness of the risk/return opportunities available in these asset classes.

Additionally, more than half of respondents said they expect to maintain their current liability coverage rates over the next two years, while just over a quarter expect to increase coverage. The proportion of respondents planning to increase coverage ratios fell by 20% following the UK government’s statement, potentially reflecting lower expected leverage going forward.

The Russell Investments study surveyed 76 UK DB pension schemes between August and October 2022, with respondents – including scheme chief executives, investment directors, trustees and pension managers – responsible for more than £100bn of managed assets. Over three-quarters of respondents were responsible for assets in excess of £100m.

Focus on climate change

DB scheme decision-makers appear increasingly focused on addressing climate change issues, with over two-thirds of respondents (68%) indicating they are “likely” or “very likely” to increase their focus on climate change issues climate in the next 12 months. This is applied by using scenario analysis to consider the risks of climate change, as well as discussing policy in this area with advisers and grassroots managers.

Climate change is also a prominent criteria in manager selection, with more than half of respondents (57%) highlighting manager research as a means by which they incorporate sustainability considerations into their investment portfolios.

Only a quarter (26%) use explicit opt-out policies to meet their climate change targets. Sustainability is embedded across the portfolio through three-quarters of schemes (76%), rather than specific allocations (20%) or the use of individual asset classes (9%).

The growing importance of climate change for DB pension stakeholders is also evident in their focus on setting net zero targets: 36% of respondents have already set a target for 2050 or earlier, 47% are in the process of considering their approach, while only 16% have decided not to set any goals.

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