Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.

In the weeks prior to recent market volatility, we asked defined benefit (DB) pension stakeholders about the challenges they face in running legacy schemes.
The results of our survey varied between small and large DB schemes and stakeholder type (i.e. sponsoring employers), but the key challenges were clear:
  • The high cost of running legacy DB schemes
  • Access to the buyout market
  • The time and cost of complying with an ever-increasing level of regulation
  • The ability to react quickly and make decisions

Since our survey closed, DB pension schemes have experienced a period of significant uncertainty, which we expect will have affected the views of stakeholders since the survey closed. The period certainly raised some questions about the industry going forward.

Do schemes need to revisit their liquidity and cashflow management processes? Can trustees and sponsoring employers react in a timely manner? Will buyout market supply be able to keep up with the demand of schemes with improved funding positions? Is buyout still the preferred option for schemes with much improved funding, or are new options emerging to make better use of the surplus?

We look in more detail at our results below.

Figure 1: What are the challenges for DB pension scheme stakeholders?

Source: abrdn DB consolidation survey 2022

High running costs 

Our findings were amplified when we reviewed the results from sponsoring employers.

The Pensions Regulator has previously reported that the cost of running a small DB scheme can be disproportionately high at around 4 times the per-member cost compared to that of a large scheme , with these costs only expected to increase. Our results tally with this. We found stakeholders of smaller DB schemes surveyed to be more concerned with high running costs than larger DB counterparts.

Time and cost of compliance with regulation

High profile corporate insolvencies and pension scams have led to an increase in regulation. While ultimately aimed at improving member outcomes, complying with regulation can be challenging, time-consuming and expensive for employers and trustees.

This is a problem facing stakeholders of DB schemes irrespective of size. However, when we asked the stakeholders what innovation they would like to see in the DB industry, one respondent noted that they would like to see an exemption for very small DB schemes in terms of regulation, with a lighter touch required.

Ability to react quickly and make decisions

Interestingly, when we reviewed the concerns of sponsoring employers, this was a more significant concern and increased to 90% of respondents. For larger schemes, this figure reduced to 65%2.

Figure 2: Are you concerned about your scheme’s ability to react quickly and make decisions?

Source: abrdn DB consolidation survey 2022

This concern is likely to be amplified for DB schemes who have been impacted by the recent gilt market volatility where schemes with a nimble governance model may have fared better.

“The additional governance burden has succeeded in closure and now consolidation of DB pensions”  - DB scheme stakeholder

Liability risk transfer

Taking the views of sponsoring employers alone, this figure increases to around 80%. With the supply and demand mismatch in the buyout market, it is understandable that this is a key concern.

With the increase in DB scheme funding levels over recent years, more schemes will be considering buyouts in shorter timeframes. Insurers have the upper hand and can be expected to review other factors like data quality, legal documentation clarity and estimated amount of time spent per £ transaction, when quoting schemes. With this in mind, will insurers favour larger scheme transactions over their smaller scheme counterparts? See our article for further reading on this topic.

Cashflow and Liquidity

The number of cashflow negative DB schemes is increasing, with the amount paid out to members each year exceeding the amount received in annual income from pension contributions and investments.

A further 29% of respondents were only slightly concerned.

The recent gilt market volatility and the impact of collateral calls within Liability Driven Investments (LDI) mandates has emphasised the importance of managing cashflow requirements and more so, the liquidity within an investment strategy. We would expect the proportion of respondents concerned with cashflow and liquidity to have increased significantly as a result.
  1. Source: The Pensions Regulator, April 2014
  2. Smaller DB schemes categorised as being below £400m in size with those above categorised as a large DB scheme.<br>