Mainly due to the gilts crisis in October 2022, trustees’ focus has been on their Liability Driven Investment (“LDI”) portfolios, ensuring the robustness of the strategy. With rising long-term gilt yields off the back of interest rate rises and inflationary pressures, collateral adequacy has been at the forefront of trustee considerations both from a liquidity perspective as well as ensuring hedging levels remain adequate to support funding position risk. 

A related point is that many pension schemes have, however, also seen improving funding positions. As a result, conversations around buying out pension scheme liabilities with insurers have been brought forward, or at least have moved higher up on trustee agendas. 

Another hot topic has been on ESG factors and in particular climate change, where trustees are focussing more on these areas and how these risks could impact overall longer-term investment strategy. Increased regulation, such as the introduction of the Taskforce for Climate-Related Financial Disclosures (TCFD), has prompted many pension schemes (>£1bn of assets) to increase their knowledge and governance spend in this area. 

Many smaller schemes have incorporated similar climate risk considerations consistent with the drive towards carbon neutral stances, which many sponsors of pension schemes have been adopting. ESG focus has also been topical when deciding on the choice of buyout/insurance provider when securing pension scheme liabilities, and so definitely an area of strong focus throughout scheme journey plans and beyond. 

Furthermore, given the challenging economic environment, including the Russian-Ukraine war and cost of living crisis, pension schemes are having to increasingly consider investment strategy on a regular basis, to determine an approach to enhance return whilst balancing risks. This has meant increased focus on the safer income-generating type assets. 

It has also involved understanding the challenges of alternative asset classes such as renewable energy and infrastructure against the current economic backdrop whilst being aware of opportunities that may enhance value. Having more alternative exposures may prove challenging from a liquidity perspective if buying out pension scheme liabilities is brought forward. Therefore, discussion with insurers in this area has also been increasing as it may have an impact on the viability of proceeding with the deal. 

Over the last twelve months, many pension schemes have found themselves to be better funded than might have otherwise been expected. Schemes and sponsors are now eyeing bulk annuity transactions in much shorter timescales. The demand isn’t just coming from fully funded schemes, but also from corporates looking at transactions as an opportunity to settle liabilities in more favourable conditions, where the absolute size of a top-up contribution has been shrunk by improved scheme finances and the reduced overall scale of pension liabilities due to higher interest rates. 

Schemes would typically work with their advisers and administrator for six to twelve months to prepare for approaching insurers. These preparations allow for governance structures to be agreed, data cleansing to be undertaken and a detailed benefit specification to be produced and legally reviewed. Indeed in years gone by, schemes journey plans have incorporated transaction preparations over an elongated period, allowing for tasks to efficiently sequenced and resources identified. 

In this new world however, schemes may want to lock into current insurer pricing quickly, but aren’t practically ready. There is then a balance to be struck: delay market approach to undertake thorough preparations, or focus on essential activities only. To complicate the picture further, ‘essential’ activities will vary between schemes, partly due to the scheme’s data quality and benefit complexity, the availability of scheme assets that can be used to pay the initial premium, but also partly due to transaction affordability, and the sponsor’s requirements regarding price certainty. 

Although data analysis has already completely revolutionised our everyday retail journeys, in the workplace many key decisions are still based purely on anecdotal evidence or instinct alone. Slowly but surely, the juggernaut is turning and analytics is on the rise in the workplace. Indeed, we are heading towards a new destination where Employer DNA will deliver sustainable, robust and innovative strategies.

"We are heading towards a new destination where Employer DNA will deliver sustainable, robust and innovative strategies."

I started by saying that “DNA is the very material that defines our uniqueness – the very substance that carries the information we need to survive and to thrive.” The same is true for Employer DNA. As you work your way up the rungs of the data analytics ladder, the closer you get to the top, the more you’ll realise that your Employer DNA really does contains the insights you need to both survive and to thrive. 

How schemes identify their preferred insurer is changing too. The market is segmenting to reflect insurers’ preferences and higher case volumes. It’s now far more common for schemes to reduce the number of insurers involved earlier in the process, as so to work with a smaller number of engaged bidders. This is because insurers are less willing to engage where their chance of winning is lower, as a result of more parties being involved. 

Trustees are also able to have regard to wider insurer offerings. In years gone by, price was commonly king, as where a sponsor top-up is required, there is typically pressure to select the cheapest provider. Whilst price is still important, schemes finding themselves in surplus at the point of transaction can find themselves able to take a more holistic view. Trustees may elect their preferred insurer based on a wider range of considerations such as price, the member experience, administration services, and ESG considerations.