DB-to-DC transfers forecast to impact on derisking strategies

Experts rejected the likelihood of a tidal wave of transfer values out of DB into DC schemes. The government anticipates less than 10 per cent of members will take up a transfer.

A consideration of both the age and wealth across the spread of members would allow schemes to chart an overall asset profile and investment strategy

Helen Powell, Allen & Overy

Matching assets may largely offset the impact of exiting transfers, and experts downplayed the potential impact of transfers on larger schemes. However, medium-sized and smaller schemes could face liquidity and cash flow management issues.

On a smaller scale, a handful of significant members might constitute a substantial portion of total liabilities, and a cohort exit from smaller schemes could also cause expensive spreads through forced selling.

Trustees, managers and legal experts were in consensus on the lack of concrete answers around the impact of the Budget freedoms. Helen Powell, professional support lawyer at Allen & Overy, said further clarification of the freedom and choice proposal should come in August with the publication of the draft legislation. 

Until then, she encouraged schemes to communicate with members about the upcoming changes to their freedoms. Powell also called upon schemes to conduct in-depth research into the demographic spread of their membership profile.

Schemes could then be able to make more informed decisions about how best to manage realisable assets in the event that significant members did choose to take up a transfer.

"A consideration of both the age and wealth across the spread of members would allow schemes to chart an overall asset profile and investment strategy to meet the requirements of members both in the short and long term," she said.

Jonathan Reynolds, client director at professional trustee company Capital Cranfield, urged trustees to maintain an awareness of the fluidity of the situation. 

"Good protocols must be in place to cope with an unknown number of members taking out transfers. The scheme must fulfil their fiduciary duty to members but they must ensure to protect the investment composition of the scheme through effective investment," he said. 

Smaller to medium-sized schemes, lacking in resources relative to their larger counterparts, could struggle more when faced with increased uncertainties and demand for liquid, realisable assets.

Howard Kearns, head of LDI for Emea at State Street Global Advisors, said: "Schemes must meet certain service requirements and so have to be proactive in establishing what members are thinking."

For larger schemes, this knowledge might not prompt large-scale action but would allow them to re-evaluate the composition of existing assets, shorten durations and adjust their LDI cash flow profile. 

Alan Pentland, pensions partner at consultancy KPMG, said the inflation-hedging and risk-management capabilities of LDI would not be particularly affected by the new freedoms. However, he said they will have a significant impact on member option exercises.

“Members must understand whether or not [the option] is right for them,” he said. “Without a long-dated liability, members must take into account the increased risks of interest rate and longevity; by writing out a capital sum or drawing down it becomes their own risk.”

Shajahan Alam, senior solutions manager in Axa Investment Manager's UK LDI team, said current members of retirement age might have significant holdings in DB schemes but in 10-15 years time that composition might have changed dramatically depending on further legislation.

"Only people who are 55 and above can take the transfer now," said Alam. "Full freedom might happen eventually but it’s not a day-one event. Significant changes and effects will take time to trickle through."