LCP launches new strategic approach to help DB schemes navigate the fresh challenges and opportunities associated with soaring pension scheme funding levels

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Changes in the market mean that pension schemes will need to think more carefully about how they approach their endgame. LCP believe the following market trends will drive scheme behaviour: 

  • Acceleration in de-risking activity - LCP is currently seeing a surge in demand for buy-ins/outs off the back of rapidly improving scheme funding levels and expects this to drive record-breaking deal volumes over 2023 and beyond.   
  • Potential constraints in insurer capacity - LCP predict there could be over £200bn of liabilities transferred to insurers over the next three years in a market that has seen around £30bn transferred in each of the past two years.   
  • Market innovation - Insurance is just one of a number of end-game approaches available to pension schemes. Longer-term alternatives, such as capital-backed solutions and CDC, provide credible new options to consider. 
  • New guidance and regulation - This includes revised restrictions on LDI leverage limits and upcoming changes to the DB funding regime, all of which will influence how pension schemes should be managed going forwards.

LCP say the time is now for Trustees and Sponsors to take stock, consider their scheme goals and establish the preparatory work that needs to be commenced to help achieve these goals in the most efficient way. 

To help schemes navigate this changing world, LCP’s services will be expanding and evolving to help schemes address these new challenges and opportunities in a cost-efficient way. 

LCP has identified some of the key priorities as:  

  • Getting on top of scheme data - In a world of increasing competition for insurance, having clean and complete data is paramount, but many schemes are struggling to prioritise scarce administration resources. 
  • Managing illiquid assets – As journey plans are accelerated, schemes will need to look to a wide range of solutions to help minimise any loss of value from assets that are being exited potentially sooner than anticipated. Schemes looking to take advantage of current opportunities to invest in illiquids will need to think carefully about how to incorporate them in their funding and investment plans. Last week LCP announced the establishment of a new Illiquid Asset Solutions Group to help schemes manage these assets and take advantage of the opportunities in the current market. 
  • Assessing the range of options - Innovation in the market is welcome, but requires a step-up in training, understanding and advice, to ensure the full range of solutions are considered and unlocked. This should include plans for managing any potential scheme surplus.  
  • Optimising the member journey and experience - for schemes targeting buy-out and wind-up, insurance is just one step on the journey. Schemes will need to ensure that specialist expertise and resource is in place to support a smooth and efficient journey for members right the way through to any eventual wind-up.

Michelle Wright, Partner and LCP’s Head of Pensions Strategy, commented: “We are entering a pivotal time in many pension schemes’ journeys and our industry as a whole. Improving funding levels will tempt some schemes to race for the exit, but the best outcomes will be available to those who take the time to warm up properly. It will be important for Trustees and Sponsors to properly consider the range of options to determine the right approach for their scheme’s specific circumstances and their members, and then to prepare thoroughly to ensure this can be realised successfully.”   

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