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On the go: Inflation and monetary policy represent the key concern for three-quarters (74 per cent) of pension trustees and their sponsors over the next six months.
According to new research from Russell Investments, which surveyed 76 defined benefit schemes between August and October 2022, these concerns featured 13 per cent higher among respondents who informed the survey after the government’s “mini” Budget in September, compared with those who responded before the announcement.
The Budget was followed by a liquidity crisis for schemes and a Bank of England gilt-purchasing programme.
Improved funding levels were the main area of focus for 68 per cent of respondents, while the proportion of respondents selecting derisking towards endgame as a priority rose by a fifth.
The proportion of respondents expecting to increase their liability hedge ratios has fallen by a fifth following the “mini” Budget. Schemes approached sponsors for additional capital in order to preserve hedging ratios and lock in improved funding levels during the turmoil, which rose as yields spiked.
More than half of respondents expect to maintain their current liability hedge ratios over the next two years. Twenty-eight per cent expect a higher hedge ratio over the period, while 14 per cent expect hedge ratios to come down.
Allocations to investment-grade bonds represent the most likely increase in a scheme’s asset allocation over the next year, with a quarter of pension funds planning to allocate more towards corporate or sovereign investment-grade fixed income.
Meanwhile, 32 per cent of respondents expect decreases in allocations to developed market equities.
In addition, 68 per cent of respondents expect their focus on climate change to increase over the next year, with a quarter of those surveyed unsure.
“Rapid rises in interest rates, as central banks have sought to combat high inflation levels, have had a significant impact on funding levels and have left DB pension schemes in a much different position to that which they might have expected 12 months ago,” said Simon Partridge, head of fiduciary management solutions at Russell Investments.
“This is leading many to revisit their long-term objectives and also review their decision-making structures and approaches.
“These discussions have been given renewed impetus by the volatility following the UK government’s “mini” Budget in September, encouraging a greater focus on outsourcing.”
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