Schroders : Higher interest rates driving UK pension scheme demand for fixed income end-game solutions

Higher interest rates are driving UK pension schemes towards fixed income end-game solutions, according to the fourth annual UK survey of pension trustees by the Pensions Management Institute ("PMI"), in association with Schroders Solutions.

The 'Navigating the key issues facing schemes' survey found that almost two-thirds (64%) of respondents have benefited from increased funding levels over the last 12 months, with 35% experiencing a rise of over 5%,

As a response to funding changes, 83% of schemes are defining an end-game strategy, with a 53/47 split between buyout and low dependency. The size of the scheme strongly influences this decision; larger schemes (over £500m) favoured low dependency whilst those under £500m favoured buyout.

Meanwhile, a noteworthy 78% of respondents are adjusting their return requirements, with the vast majority now looking to reduce their targets. The shift to a higher interest rate environment has created a surplus for some schemes, with 1 in 5 considering returning this to the employer.

Of the respondents looking to make asset allocation shifts over the next 12 months, some 38% were targeting increased corporate bond allocations and 29% greater LDI exposures. Some 38% and 40% of investors were looking to reduce their equity and illiquid allocations respectively. This trend is more pronounced among those targeting a buyout outcome.

Furthermore, almost half the schemes surveyed (49%) said liquidity needs will be an increasingly important priority in decision-making during 2024.

Ronan O'Riordan, Head of UK Business Development, Institutional, at Schroders, said:

"These results indicate that schemes will likely continue moving towards lower-risk, lower-return seeking portfolios. Allocations to fixed income could offer schemes several benefits including providing predictable income streams, stabilising returns and offering lower volatility compared with equities. Fixed income can also be structured to deliver regular cashflows which can be aligned to liquidity demands, further enhancing their suitability for these schemes.

"The shift towards LDI and this emphasis on liquidity could also indicate a trend towards reducing leverage and increasing collateral coverage. This would improve schemes' liquidity and resilience to market shocks, a key lesson from the 2022 gilts crisis. This suggests schemes are either learning from past experiences or simply adhering to regulatory guidance."

Tim Middleton, Director of Policy and External Affairs at the PMI comments:

"This survey provides a very clear assessment of the UK's Defined Benefit sector in 2024. The most prominent picture is of the number of schemes which have become very mature and which also have sufficient funding to consider the most appropriate endgame solution. For mature DB schemes, this is seen through the reported attraction to corporate bonds and a corresponding reduction in exposure to equities. Trustees clearly see liquidity as important in their schemes' stage of the glide path and this is reflected in reduced exposure to illiquid assets.

"It is also interesting to note how trustees' thinking concerning endgame solutions has evolved in recent years. Until very recently, bulk annuitisation was seen as the only viable option. While 45% of the surveyed schemes are considering this, 40% are considering the alternative of run-off. Many smaller schemes may also be considering the new option of DB consolidation."

The PMI's Fiduciary Management ("FM") Strategic Forum was created in 2021 as a partnership between Schroders Solutions and the PMI. This group represents many of the third-party evaluation firms involved in the FM market, along with senior independent trustees. Its focus is on discussing the key issues affecting pension schemes across all governance models and sizes and its findings have informed the topics of this year's survey.

- ENDS -

For further information on Schroders, please contact:

Andy Pearce, Head of Media Relations	[phone]	[e-mail]
Rachael Dowers, PR Manager	[phone]	[e-mail]

For further information on PMI, please contact:

Ged Brumby, Edelman Smithfield

[phone]

[e-mail]

Note to Editors

About the study

This survey analyses the perspectives of UK pension schemes with 102 respondents. The research was carried out via an online survey from 29 November 2023 to 16 January 2024. Throughout the report, we complement our findings with commentary and insights from Schroders Solutions and industry experts.

To view the latest press releases from Schroders visit: http://ir.schroders.com/media

Schroders Solutions

Schroders Solutions is a £228.3 billion global capability with employees in the UK, US, Singapore, and Germany. Our dedicated solutions experts provide investment and advisory services to public and corporate pension schemes, official institutions, insurance companies, individual investors, intermediaries and wealth providers worldwide. Solving investment problems is integral to what we do. We draw on our knowledge and experience as a global provider to build bespoke investment solutions and strategies. We partner with our clients to understand their investment challenges and construct investment portfolios that deliver their desired financial outcomes. Our consultative approach draws on both Schroders' investment skills and those of the wider investment industry. Schroders Solutions offers Fiduciary Management, Outsourced CIO, liability, duration and cashflow driven investing, as well as derivatives-based growth strategies. Our solutions are accessible to clients of all sizes through a flexible approach to implementation, sensitive to their needs and objectives.

Source: Schroders as of 31 December 2023.

Schroders plc

Schroders is a global investment management firm with £750.6 billion (€866.2 billion; $956.9 billion) assets under management, as at 31 December 2023. Schroders continues to deliver strong financial results in ever challenging market conditions, with a market capitalisation of circa £7 billion and over 6,100 employees across 38 locations. Established in 1804, the founding family remains a core shareholder, holding approximately 44% of Schroders' shares.

Schroders has benefited from a diverse business model by geography, asset class and client type. It offers innovative products and solutions across four core growing business areas; asset management, solutions, Schroders Capital (private assets) and wealth management. Clients include insurance companies, pension schemes, sovereign wealth funds, high net worth individuals and foundations. Schroders also manages assets for end clients as part of its relationships with distributors, financial advisers and online platforms.

Schroders aims to provide excellent investment performance to clients through active management. It also channels capital into sustainable and durable businesses to accelerate positive change in the world. Schroders' business philosophy is based on the belief that if we deliver for clients, we will deliver for our shareholders and other stakeholders.

Issued by Schroder Investment Management Limited. Registration No 1893220 England. Authorised and regulated by the Financial Conduct Authority. For regular updates by e-mail please register online at www.schroders.com for our alerting service.

About the Pensions Management Institute

The PMI is the professional body which supports and develops the experts who run UK pension schemes. It has the broadest skills base of pensions professionals and trustees in the UK, with over 7000 members dedicated to establishing, maintaining and advancing the highest levels of pensions knowledge. PMI members are responsible for managing and advising some of the largest institutions in the world and taking key decisions on substantial financial matters. With some £1 trillion invested in UK pensions, PMI members have a vital role to play in shaping the nation's financial future. With almost 40 years of successful operation behind it, the PMI is an organisation at the cutting edge of pensions. For full details of PMI's qualifications, membership grades and ongoing support services visit www.pensions-pmi.org.uk.