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DB schemes closing as de-risking continues

DB schemes closing as de-risking continues

Mona Dohle
Wednesday 2nd May 2018

Large final salary pension schemes are increasingly focusing on de-risking as a “significant” increase in cash payments to members is expected in the coming years, a consultancy believes.

Bulk annuity transfers and liability management programmes are forecast to remain popular in the coming years, while a greater number of defined benefit (DB) pension schemes with more than £1bn in assets are shutting their doors.

Only 4% of such schemes accept new members, a survey by pension consultancy Barnett Waddingham has discovered.

These findings are significantly more drastic than those provided by the Pension Protection Fund, which estimated at the end of 2017 that 12% of DB schemes were open to new members.

While Barnett Waddingham’s survey focuses exclusively on larger schemes, their strategies are expected to influence the behaviour of smaller funds.

Andrew Vaughan, Barnett Waddingham partner, predicts: “The largest occupational schemes in the UK are an integral part of the economy and strongly influence the behaviour of smaller schemes with respect to developing innovative methods of sponsor support and risk mitigation.”

Among the key themes which will continue to dominate the industry are schemes’ de-risking efforts through the increase in bulk annuity transfers and liability management programmes, Barnett Waddingham believes.

As the value of bulk annuity transactions has increased to £12bn in 2017 from £10bn in 12 months, the consultancy warns that future transfers by larger schemes could increasingly lead to capacity issues in the bulk annuity market.

Since the introduction of pensions freedoms in 2015, schemes are also reporting growing demand for transfer value requests, the median of requests increased by 56% in 2017 while some schemes saw an increase of up to 200%, the survey revealed.

The research also discovered that the average one-year investment return of schemes included in the survey in 2017 was 18.9%, a significant increase on the 3.1% recorded in 2016.

This improvement has been partially achieved by improved returns on corporate bond yields.

Larger schemes have also increasingly opened their portfolios to alternative strategies such as infrastructure, derivatives and hedge funds.

On average, the schemes currently have 23% of their assets invested in equities, 32% in bonds, 5% in property, 2% in cash and 38% in alternatives.


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