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How big pension schemes reduce risk

Published by Andrew Vaughan on

Lewys Curteis contributed to the writing of this blog post

The private sector’s big schemes are the industry’s trend-setters.

We have recently released our fourth annual survey relating to private sector defined benefit (DB) pension schemes in the UK with assets of over £1 billion.  Our research highlights innovations spearheaded by these big schemes which may soon become more widely known. 

Focus on de-risking

The majority of employers have taken steps to contain the growth of their future pension liabilities, according to our analysis, with only 3% of large final salary schemes remaining open to new members.

As employers look to remove further pension scheme risk, demand in the bulk annuity market remains high.  Whether or not a bulk annuity transaction is a feasible option will largely depend on the funding position of a scheme.

The majority of employers have taken steps to contain the growth of their future pension liabilities, according to our analysis, with only 3% of large final salary schemes remaining open to new members.

Impact of deficit contributions

The funding position of the big schemes has improved slightly this year, with an average funding level of 96% on the company accounting basis, relative to 94% last year.  Our analysis suggests that the significant deficit reduction contributions being paid into the big schemes (an average of £97 million this year) are having some impact.

However, market conditions have not been kind since the dates covered by our survey, and schemes facing forthcoming valuations may have challenging times ahead.  Schemes with valuation dates of 31 March 2016 are likely to be most affected and employers/trustees should engage early with the valuation process to avoid surprises.

Innovative investment strategies

The Pensions Regulator is encouraging schemes to ensure that their investment strategy remains appropriate as their active membership falls.  The big schemes’ allocation to equities has fallen slightly over the year, our survey shows, with a corresponding increase in the allocation to 'other' investments.  This includes pooled investment vehicles and alternative asset classes, such as derivatives.  This may reflect the increase in popularity of liability-investment strategies for maturing schemes.

Pension innovations tend to stem from the big schemes and work their way through to smaller schemes as the strategies become more refined and accessible.  Liability-driven investments are one example of this, but longevity risk transfers are also now becoming available to the smaller schemes.  Growth in reinsurer appetite, efficiencies and innovative structures mean that these deals will be more and more accessible to mid-sized pension schemes over the next few years.


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About the author

  • Andrew Vaughan

    Andrew advises a range of UK and international businesses on DB pension issues including pension scheme funding, risk reduction exercises, pension benefit design, M&A transactions and accounting disclosures.

    View Biography

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