DB schemes overestimating endgame timeline goals

A survey of 120 UK pension schemes with assets ranging in size from £50m to more than £1bn showed that 34 per cent of these are now targeting buyout, a percentage that “is consistently increasing as schemes’ funding positions improve and as buyout becomes more attainable”.

Michael Walker, associate partner in the risk settlement group at Aon, argued that it is good news that 77 per cent of schemes are now more than 80 per cent funded on their endgame target.

“However, at the moment, only 26 per cent of schemes expect to reach their endgame in less than five years.

“In our experience, we believe schemes may be overestimating how long it will take to reach that target. We can understand why they might think that’s the case, but cautious forecasts can heighten the risk of missing opportunities along the journey.”

Walker explained that the past few years showed that the time taken by schemes to reach “endgame targets is invariably less than expected”.

He added “Therefore, trustees and sponsors need to ensure that they are fully prepared to take their next step when the opportunity arises.”

Aon’s research also showed that only 32 per cent of pension schemes currently assess their investment performance relative to their low risk measure or buyout cost.

However, the consultancy saw an accelerating move towards benchmarking against the endgame target, as the schemes’ funding positions improve.

Walker said: “Pension schemes are now almost certainly better placed in relation to their endgame than they might have expected even as few as five years ago. But they need to maintain a proactive approach to make the most of the situation.

“For example, it’s good to see that phased buy-ins are being used as a risk management tool by many schemes, with the majority also taking the time to understand how these transactions would impact their investment strategy.”