Global re/insurance broker Aon has said that with 2022 promising to be another active year in the UK pension risk settlement market, an increasing number of schemes are focusing on their investment approach in the bid to be “settlement ready”.
Aon’s recent Global Pension Risk Survey 2021/22 showed that more UK defined benefit (DB) pension schemes are now opting for buyout as their long-term target, with trustees “ever more aware” that they need to take steps to prepare, such as data cleansing, providing benefit specifications, or agreeing their governance structure.
The firm suggests that pension schemes are also seeing the benefit of taking the same approach with their assets, and investing with the endgame of buyout in mind and starting the preparation as early as possible.
In addition, Aon’s Risk Settlement team found that early investment preparation offers several advantages which includes: avoiding roadblocks such as long data illiquid assets which can increase risk and cost, matching insurer pricing more effectively by allocating more to assets such as gifts, swaps and credit, reducing exposure to assets that insurers do not want, and taking the option to integrate buy-ins as part of the overall plan, in order to reduce risk and cost ahead of full buyout.
Lucy Barron, Partner at Aon commented: “Whatever the timeframe they have in mind for reaching their scheme’s endgame, trustees need to think about the most efficient investment strategy that will allow them to reach it. There are several investment options to consider that give schemes the best opportunities. For example, ensuring liabilities are fully protected against movements in interest rates and inflation helps reduce the risk of assets moving in a different direction – something which is increasingly a consideration.
Barron explained that trustees will also need a portfolio that is well-diversified, so that it can navigate volatility and generate the returns needed, with the least risk possible.
She continued: “There are good reasons for taking this more holistic approach to reaching a scheme’s endgame. The ultimate aim is for the scheme to get to buyout with reduced risk and more certainty. That involves thinking about managing longevity, investment and other risks such as movements in insurer pricing. In a very busy market, insurers will always prioritise well-prepared schemes – and that equates to better pricing and lower cost.
Barron also warned that it is clear that this is now a more mature market with schemes having a greater understanding of what’s needed to get them to their endgame.
She continues: “As advisers, we can help create a journey plan to buyout, which takes into consideration investment and longevity risks, including the use of buy-ins at the right time.
“We increasingly offer schemes a flexible toolkit – including using synthetic credit as a less expensive and more adaptable way of adjusting credit exposure and locking into insurer pricing. We are also helping schemes to set strategic targets for hedging and credit exposure, and then adjusting them based on insurer feedback and market conditions.
“But there is no substitute for market knowledge, so an understanding of insurer investment strategies allows schemes to make better decisions, either by having their investments aligned with those of insurers ahead of reaching full buyout funding, or by managing themselves out of illiquid assets with the least risk and cost.”
