Redefining Defined Benefits
UK defined-benefit pension schemes are operating in an increasingly demanding environment. Improved funding has moved the endgame discussion up the agenda, yet more options exist now than ever before. At the same time, the complex regulatory framework is constantly evolving, while investment markets are uncertain and volatile.
There is no ‘one-size-fits-all’ solution to the endgame question, but the endgame strategy selected often depends upon the trustees’ strategy and strength of the sponsor covenant.
Commonly, two end game options are considered:
- Buy-out; transferring pension obligations to an insurer
- Run-on; retaining oversight of the scheme’s obligations and investment strategy
When run-on is preferred, trustees are actively considering how best to future proof their advisory arrangements and investment strategy.
Many schemes have partnered with a Fiduciary Manager or Outsourced Chief Investment Officer (OCIO) to create a tailored delegated investment decision making model. The resulting partnership can reduce the trustee’s governance burden and ensures that risk and cost budgets are spent in an appropriate manner.
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Given the long-time horizon of scheme obligations, trustees should analyse and prepare their portfolios for the risks and opportunities associated with the transition to a low-carbon, more inclusive economy. This long-term perspective puts schemes in a position to proactively assess and mitigate these risks and invest in solutions that profit from this long-term trend.
