Welcome to IQ
Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.
Change since 31 March 2024
Commentary
- Corporate bond and gilt yields increased by c. 0.25-0.3% and long-term inflation fell by 2-3 basis points over the quarter
- Credit spreads increased slightly (less than 5 basis points) over the quarter
- Equity markets saw a positive quarter (returning c.+3%)
- These movements are likely to have improved buyout positions due to reductions in liabilities exceeding reductions in assets
- Accounting and funding positions are also expected to have improved in general, other than for well-hedged schemes with low proportions of return seeking assets
New Labour government and what it could mean for pensions
Background
With Labour securing a sizeable majority their promised pensions review has the potential to be more radical and grasp some of the thornier pensions issues. Their manifesto noted this would look to improve member outcomes, ensure schemes take advantage of consolidation, and to increase productive investment in UK markets. Although they dropped plans to reintroduce the Lifetime Allowance, pensions might be seen as a convenient target for ‘stealth’ taxes when fiscal circumstances are tight.
Emma Reynolds has been confirmed as the new pensions minister. Interestingly, she has been appointed to both the Department of Work and Pensions and the Treasury. This may be a deliberate attempt to provide a more joined up approach to policy and dealing with two separate regulatory bodies (The Pensions Regulator and the Financial Conduct Authority).
Isio’s view
We hope the scope and timescale of a pensions review will be clarified quickly. Equally, it will be important to understand what existing pensions policy developments a new Pensions Minister will accelerate, put on the back-burner or bin altogether. Whilst ongoing initiatives such as CDCs and dashboards are likely to continue as planned there are some areas of uncertainty such as extension of auto-enrolment, DB surplus extraction and the PPF as a public sector consolidator. Proposed changes to employment laws will also see extended pay gap reporting requirements and greater policing through a Single Enforcement Body.
Why it matters
Whilst the change in government is unlikely to lead to an immediate change in direction of pensions policies, there could be a re-prioritisation which employers will have to adapt to. We hope to see longstanding policy initiatives finalised quickly, e.g. the new funding code, and areas of uncertainty addressed promptly, e.g. DB surplus extraction. For any changes to employment laws, we hope time will be given for proper industry consultation.
More on the government’s plans for pensionsInvestment grade credit spreads at historic lows – time to review?
Background
Investment grade corporate bond spreads have narrowed significantly since the gilt market crisis that occurred following 2022’s mini-budget. With credit spreads now at historic lows, there is little room for them to tighten further, limiting the additional return an investor might expect to receive over equivalent government bonds and providing limited protection against defaults.
Isio’s view
We see the downside risk of holding investment grade corporate bonds being greater than the upside. With spreads more likely to widen than to narrow further resulting in prices to fall relative to government bonds, we see an exposure for pension schemes’ funding positions to deteriorate. We believe there is merit in clients reviewing and reducing their exposure to investment grade credit, or pausing any planned increases.
Why it matters
Investment grade corporate bonds have generally been seen as a key building block of de-risked investment portfolios, primarily due to the asset being perceived as low risk and providing a stable income and linkage to how insurers price insurance transactions. However, from our discussions with insurers we believe the link between corporate bond spreads and insurance pricing currently to be weak, meaning buying investment grade credit prior to insurance may not be an optimal strategy. Sponsors should challenge these preconceptions at current spreads and consider other assets which could provide a better risk-return outlook.
Uncovering the most influential Professional Trustees
Background
With the growing burden of pensions regulation, trustee boards are under pressure to have the right skillsets to run their schemes effectively. Sponsors and trustees are increasingly turning to commercial trustee firms for support. Isio’s annual Independent Trustee survey uncovers the most influential firms and is a must-read for those selecting a professional trustee.
Isio’s view
The professional independent trustee market is thriving and among the most notable trends is the rise of sole trusteeship, including the increasing use of this model by larger schemes. There is also a growing differentiation in firms which ranges from firms that are focused exclusively on trusteeship to those that offer bundled models including a range of governance and support services.
Why it matters
Having skilled and experienced trustees in place can enable faster decision-making and can often ease the burden on the sponsor’s management time. In addition, the Regulator is placing increased focus on the diversity of trustee boards which is further driving the growth in independent trustee appointments. Sponsors should consider whether their existing trustees have the right skills, capabilities and diversity to help deliver their future pensions strategy.
Read the report
What are DC providers planning?
Background
Following the launch of the Mansion House Compact in 2023, there have been increased murmurings from DC providers regarding their plans to incorporate illiquid assets into their default investment strategies. However, the degree of transparency in these plans vary, with few clearly setting out their plans beyond stating “it’s in the pipeline”. Our DC Investment team have spoken to 12 major commercial Master Trusts on their plans for incorporating illiquid assets into their defaults.
Isio’s view
We would like to see meaningful allocations to illiquid assets within DC defaults in the future with a clear plan from providers. We believe allocations should reflect diversification across managers and asset types within the ‘illiquid’ banner. We also hope providers view this as an opportunity to incorporate sustainable themes more boldly within defaults.
Why it matters
Adopting illiquids assets within DC defaults should help improve outcomes for members in retirement, but how providers implement this, and when, will be important. This is a new opportunity for DC providers and we expect to see significant innovation across the market over the coming months. Our series of papers on this over the next year aims to provide transparency in providers plans and adoption of this asset class.
See our DC market update
The majority of providers are moving towards a ‘two default’ route, with premium and low cost default options, although all providers are planning on including illiquids assets in at least one.
Find out more about illiquidsPurposeful Run On – senior executives at large scheme sponsors give their view
Background
With UK DB schemes better funded than they have been for decades, employers are considering whether to take the opportunity to remove DB schemes from their balance sheets at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we hosted a roundtable event for senior executives sponsoring large UK DB schemes.
Isio’s view
The main themes emerging from the discussion are shown in our report opposite. In our view, there are several changes that could help turn DB schemes from a “problem” into an “opportunity” e.g. the legislative changes consulted on by the previous Government and better guidance from the Pensions Regulator that reflects the reality of surplus. However, for many schemes surplus can already be released gradually under existing legislation, and sponsors should find out whether this applies for their schemes.
See how we are outpacing change
Why it matters
Deciding whether to insure at the earliest opportunity or adopt a Purposeful Run On for the medium to long-term (or something in-between) will be the most financially important decision that most trustees and employers ever agree for their schemes. The views of the sponsor are crucial, but trustees typically hold much of the power in “endgame” discussions. It can be easier to agree the sponsors preferred approach if it is raised early, so it is important for sponsors to quantitatively assess different options.
- The appeal for the Virgin Media Ltd v NTL case, which could have implications for schemes that haven’t found relevant S37 certificates, was heard by the Court of Appeal on the 25th June. However, it’s also not clear whether the appeal ruling will clarify the position for all schemes going forward. We anticipate the judgement will be published early Autumn but this has not been made clear yet.
- Isio will be hosting its first ever Investment Conference in London this October. We would love for you to join us for an insightful afternoon where we will delve into new innovative investment strategies, societal impacts, and tomorrow’s key asset classes – against the backdrop of the new Labour government in the UK and impending elections in the US. You can register here.
- We’ll also be hosting an accounting webinar in Autumn covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list.
-
Change since 31 March 2024
Commentary
- Corporate bond and gilt yields increased by c. 0.25-0.3% and long-term inflation fell by 2-3 basis points over the quarter
- Credit spreads increased slightly (less than 5 basis points) over the quarter
- Equity markets saw a positive quarter (returning c.+3%)
- These movements are likely to have improved buyout positions due to reductions in liabilities exceeding reductions in assets
- Accounting and funding positions are also expected to have improved in general, other than for well-hedged schemes with low proportions of return seeking assets
-
New Labour government and what it could mean for pensions
Background
With Labour securing a sizeable majority their promised pensions review has the potential to be more radical and grasp some of the thornier pensions issues. Their manifesto noted this would look to improve member outcomes, ensure schemes take advantage of consolidation, and to increase productive investment in UK markets. Although they dropped plans to reintroduce the Lifetime Allowance, pensions might be seen as a convenient target for ‘stealth’ taxes when fiscal circumstances are tight.Emma Reynolds has been confirmed as the new pensions minister. Interestingly, she has been appointed to both the Department of Work and Pensions and the Treasury. This may be a deliberate attempt to provide a more joined up approach to policy and dealing with two separate regulatory bodies (The Pensions Regulator and the Financial Conduct Authority).
Isio’s view
We hope the scope and timescale of a pensions review will be clarified quickly. Equally, it will be important to understand what existing pensions policy developments a new Pensions Minister will accelerate, put on the back-burner or bin altogether. Whilst ongoing initiatives such as CDCs and dashboards are likely to continue as planned there are some areas of uncertainty such as extension of auto-enrolment, DB surplus extraction and the PPF as a public sector consolidator. Proposed changes to employment laws will also see extended pay gap reporting requirements and greater policing through a Single Enforcement Body.
Why it matters
Whilst the change in government is unlikely to lead to an immediate change in direction of pensions policies, there could be a re-prioritisation which employers will have to adapt to. We hope to see longstanding policy initiatives finalised quickly, e.g. the new funding code, and areas of uncertainty addressed promptly, e.g. DB surplus extraction. For any changes to employment laws, we hope time will be given for proper industry consultation.
More on the government’s plans for pensions -
Investment grade credit spreads at historic lows – time to review?
Background
Investment grade corporate bond spreads have narrowed significantly since the gilt market crisis that occurred following 2022’s mini-budget. With credit spreads now at historic lows, there is little room for them to tighten further, limiting the additional return an investor might expect to receive over equivalent government bonds and providing limited protection against defaults.Isio’s view
We see the downside risk of holding investment grade corporate bonds being greater than the upside. With spreads more likely to widen than to narrow further resulting in prices to fall relative to government bonds, we see an exposure for pension schemes’ funding positions to deteriorate. We believe there is merit in clients reviewing and reducing their exposure to investment grade credit, or pausing any planned increases.
Why it matters
Investment grade corporate bonds have generally been seen as a key building block of de-risked investment portfolios, primarily due to the asset being perceived as low risk and providing a stable income and linkage to how insurers price insurance transactions. However, from our discussions with insurers we believe the link between corporate bond spreads and insurance pricing currently to be weak, meaning buying investment grade credit prior to insurance may not be an optimal strategy. Sponsors should challenge these preconceptions at current spreads and consider other assets which could provide a better risk-return outlook.
-
Uncovering the most influential Professional Trustees
Background
With the growing burden of pensions regulation, trustee boards are under pressure to have the right skillsets to run their schemes effectively. Sponsors and trustees are increasingly turning to commercial trustee firms for support. Isio’s annual Independent Trustee survey uncovers the most influential firms and is a must-read for those selecting a professional trustee.
Isio’s view
The professional independent trustee market is thriving and among the most notable trends is the rise of sole trusteeship, including the increasing use of this model by larger schemes. There is also a growing differentiation in firms which ranges from firms that are focused exclusively on trusteeship to those that offer bundled models including a range of governance and support services.
Why it matters
Having skilled and experienced trustees in place can enable faster decision-making and can often ease the burden on the sponsor’s management time. In addition, the Regulator is placing increased focus on the diversity of trustee boards which is further driving the growth in independent trustee appointments. Sponsors should consider whether their existing trustees have the right skills, capabilities and diversity to help deliver their future pensions strategy.
-
What are DC providers planning?
Background
Following the launch of the Mansion House Compact in 2023, there have been increased murmurings from DC providers regarding their plans to incorporate illiquid assets into their default investment strategies. However, the degree of transparency in these plans vary, with few clearly setting out their plans beyond stating “it’s in the pipeline”. Our DC Investment team have spoken to 12 major commercial Master Trusts on their plans for incorporating illiquid assets into their defaults.
Isio’s view
We would like to see meaningful allocations to illiquid assets within DC defaults in the future with a clear plan from providers. We believe allocations should reflect diversification across managers and asset types within the ‘illiquid’ banner. We also hope providers view this as an opportunity to incorporate sustainable themes more boldly within defaults.
Why it matters
Adopting illiquids assets within DC defaults should help improve outcomes for members in retirement, but how providers implement this, and when, will be important. This is a new opportunity for DC providers and we expect to see significant innovation across the market over the coming months. Our series of papers on this over the next year aims to provide transparency in providers plans and adoption of this asset class.
The majority of providers are moving towards a ‘two default’ route, with premium and low cost default options, although all providers are planning on including illiquids assets in at least one.
Find out more about illiquids See our DC market update -
Purposeful Run On – senior executives at large scheme sponsors give their view
Background
With UK DB schemes better funded than they have been for decades, employers are considering whether to take the opportunity to remove DB schemes from their balance sheets at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we hosted a roundtable event for senior executives sponsoring large UK DB schemes.Isio’s view
The main themes emerging from the discussion are shown in our report opposite. In our view, there are several changes that could help turn DB schemes from a “problem” into an “opportunity” e.g. the legislative changes consulted on by the previous Government and better guidance from the Pensions Regulator that reflects the reality of surplus. However, for many schemes surplus can already be released gradually under existing legislation, and sponsors should find out whether this applies for their schemes.
Why it matters
View report See how we are outpacing change
Deciding whether to insure at the earliest opportunity or adopt a Purposeful Run On for the medium to long-term (or something in-between) will be the most financially important decision that most trustees and employers ever agree for their schemes. The views of the sponsor are crucial, but trustees typically hold much of the power in “endgame” discussions. It can be easier to agree the sponsors preferred approach if it is raised early, so it is important for sponsors to quantitatively assess different options. -
- The appeal for the Virgin Media Ltd v NTL case, which could have implications for schemes that haven’t found relevant S37 certificates, was heard by the Court of Appeal on the 25th June. However, it’s also not clear whether the appeal ruling will clarify the position for all schemes going forward. We anticipate the judgement will be published early Autumn but this has not been made clear yet.
- Isio will be hosting its first ever Investment Conference in London this October. We would love for you to join us for an insightful afternoon where we will delve into new innovative investment strategies, societal impacts, and tomorrow’s key asset classes – against the backdrop of the new Labour government in the UK and impending elections in the US. You can register here.
- We’ll also be hosting an accounting webinar in Autumn covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list.
Join our mailing list
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