So what’s stopping schemes from de-risking? Pensions Insight’s survey goes digging
So why aren’t all trustees pursuing a de-risking strategy?
Lack of knowledge or resources, as well as inclement investment conditions were cited by many survey respondents. According to 64.8% of respondents, their scheme’s funding situation makes it impossible . Some trustees and pension managers blamed their sponsor’s lack of resources (16.9%), while others bemoaned the lack of suitable options available on the market (12.7%).
Dicker is sceptical of the last answer: “I’ve never found a scheme yet where there weren’t some suitable options to reduce risk.” Scheme size can also hinder de-risking.
It is much more difficult for smaller schemes without racking up lots of additional costs
Mark Humphreys, head of UK strategic solutions at Schroders, says: “Larger pension schemes have the corporate governance budget needed to engage in a de-risking strategy, but this is much more difficult for smaller schemes without racking up lots of additional costs.”
One trustee explained that his pension scheme was unable to de-risk because of the “cost, understanding, time and [level of ] technical detail” necessary to understand the different options. Colin Richardson, senior corporate consulting actuary at Buck Consultants, says: “Trustees are consistently increasing in their knowledge of both asset and liability de-risking. However, this does vary enormously between schemes.”
He went on to emphasise the importance of trustee training prior to the board making big de-risking decisions. Some trustees said that the world was changing too quickly, blaming interest rates, ever-changing gilt values and longevity assumptions. One says that de-risking was “not a financially attractive option”.
Another blamed “trustee and sponsor resistance to bringing insurance into investment decisions”. There are many reasons why trustees might not have spoken to a de-risking provider. Perhaps they are using a mechanism like liability-driven investing, which does not need the services of a de-risking provider. Boyes says: “I think it comes down to how you define de-risking. It could be cleaning up your data, or a liability-type investment strategy, the performance of trustees – there’s a lot of those things. You can recognise it’s important but there’s not necessarily somebody you’re going to talk to other than your normal advisers who are going to do it for you.”
GOING THE OTHER WAY
While some schemes busily de-risk, surprising numbers of trustees and pension managers are considering steps to put risk back on the table. Almost half of those surveyed (47%) are considering a return to riskier investment assets and strategies. This improved confidence could be a result of the stronger performance of equity markets in 2013, which has had a positive impact on pension fund deficits.
I think a lot of trustees are starting to think about getting more risk-on to achieve greater growth
The Pension Protection Fund’s 7800 index showed schemes in the index had seen their deficits decrease by £9.7bn from the end of January onwards. The apparent appetite for re-risking comes as no surprise to Boyes, who says it probably reflects trustees and scheme managers’ reluctance to de-risk while their schemes are still in deficit, thus locking themselves into a poor funding position.
“I think a lot of trustees are starting to think about getting more risk-on to achieve greater growth. Trustees haven’t got much alternative but to hope that re-risking assets will lift them out of the doldrums. The recent increase in equity markets has reinforced that view.”
Richardson explains: “In general terms there is a perception that low-risk assets are highly priced at present and that over the next period of time equity markets may perform well. In addition, some perceive a need for more inflation protection but index-linked gilts are very expensive – equities or other growth assets may provide some more protection, even if it is not a direct inflation protection.”
However, Towers Watson’s Aley says he has not seen much evidence from trustees that re-risking is happening. The equity market’s recent gains may actually spur on de-risking, he points out. “A rise in equity values, in some instances, will create a risk budget for de-risking. So if your scheme’s equity performance is ahead of what you were forecasting, you may well sell out of some of that, locking into some of the gains you have made, and use that to de-risk somewhere else.
“That’s very relevant for funds that have trigger-based de-risking strategies, particularly if those triggers are funding-related.”
Schemes that have benefited from the equity market’s upturn and are now considering insurance-style de-risking solutions such as buy-ins and buyouts may struggle to get a good deal if they hesitate, warns Martyn Phillips, head of buyouts at JLT.
Phillips warns a capacity crunch is on the cards among insurance and advice providers. “Insurers don’t have unlimited resources, therefore they focus on a limited number of deals at a time.” Phillips recalls that during the previous boom time for de-risking around 2008, insurers weren’t even able to provide quotes for the vast majority of schemes.
“There will be a stampede,” he says, suggesting that trustees and pension managers need to be prepared to act quickly when the moment comes to buy an insurance product.
Perhaps Phillips’ words will galvanise the 25% of trustees and scheme managers who do not have a de-risking plan in place. They will not want to be left behind when the time to de-risk arrives.