Nearly half (47 per cent) of UK defined benefit (DB) pension schemes are targeting buyout as their long-term target, whilst 34 per cent are targeting self-sufficiency, research from Aon has revealed.

This is a marked increase in the proportion of schemes targeting buyout in previous years, and represents the first time since the launch of Aon’s Global Pension Risk Survey that more schemes have targeted buyout over self-sufficiency.

A reliance on asset performance was the most common route to the long-term target, cited by 63 per cent of scheme trustees, although over half (54 per cent) expected to be able to reach their long-term target simply by sticking to their agreed funding plan.

In addition to this, the proportion of schemes that expect to need additional contributions beyond the agreed recovery plan to reach their long-term aim has nearly halved in comparison to previous years, falling from 46 per cent in 2019 to 24 per cent in 2021.

Commenting on the findings, Aon partner and head of UK retirement policy, Matthew Arends, said: “The Covid-19 pandemic created challenges for schemes and their sponsors, with many choosing to reassess the risks they faced.

“However, since the initial market reaction, pension scheme funding levels have recovered and many schemes are in a better place than at the start of 2020. As schemes have seen improvements in funding positions, lower-risk targets now seem more achievable.

“In a trend tracked over the last eight years, this survey has seen the number of schemes targeting buyout more than doubling, to a point where now it has become the single leading long-term target for UK DB pension schemes.

“We expect that the remaining 8 per cent of schemes which are without a long-term target will have to develop one in the near future, driven by both the Pension Schemes Act 2021 and the current consultation by The Pensions Regulator on a new Code of Practice for funding.

“As regulation on commercial consolidators is also progressing, in the future we expect to see some schemes formally looking to move to a consolidator as their long-term target.”

Arends also noted that the average timescale to reach long-term targets had fallen from 9.4 years in 2019 to 8.8 years in 2021, with 65 per cent of pension schemes expecting to reach their long-term target within 10 years.

“This continues the trend seen in recent Global Pension Risk Surveys and is a particularly notable reduction given the disruption caused by the Covid-19 pandemic and the general increasing strength of long-term targets," he said.

Adding to this, Aon partner, Alastair McIntosh, warned that while buyout is now the preferred endgame for schemes, it is not without complications.

"What this year’s data clearly shows is that before the end of the 2020s, the average pension scheme will have reached its long-term target," he said. "Inevitably, this will put pressure on an already busy insurance market."

McIntosh suggested that this should not be a cause for concern, however, highlighting the resilience of the bulk annuity market over the past five years, with annual transaction volumes more than tripling.

He said: "We expect there to be a further increase in demand in the very near future, which will almost certainly see more occasions where insurers are selective about which schemes to engage with.

"Even so, with a carefully considered strategy and good planning in place, schemes will still be able to access attractive pricing and terms.”

He also warned that market capacity restrictions exist in other parts of the process too, noting that while two-thirds of schemes are planning member option exercises in the next 12-24 months and over one in four envisage offering paid independent financial adviser (IFA) support, there is a limited number of available advisers.

"Schemes have a duty of care to members and it is reasonable to expect that demand for IFA advice will rise as schemes progress to their endgame," he continued.

“Whether schemes are targeting buyout or running on as their long-term target, it will be crucial for schemes to focus on an overall strategy to remain resilient and to navigate new forms of volatility.

"This stretches beyond the more traditional investment and funding risks and can incorporate projects such as longevity, data cleansing, liability management, cyber risk and GMP equalisation.

"What is clear from the survey, is that with just 40 per cent of schemes having a cyber response plan and only 33 per cent in the process of implementing GMP equalisation, many schemes have a lot of work to do before approaching their long-term target.”

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