Collateral sufficiency, including creating or revisiting a liquidity waterfall, is expected to be a “key priority” for pension schemes in 2023, following the liquidity issues faced by defined benefit (DB) schemes in 2022, Hymans Robertson has said.

Following on from the market volatility seen after September’s mini-Budget, and subsequent inquiries into the causes of these issues, Hymans Robertson co-head of trustee defined benefit (DB) investment, Elaine Torry, explained that schemes will likely need plans that set out in advance which assets should be sold, in the right order.

Torry suggested that this plan could include factoring in the speed, cost and impact of volatility when selling assets, together with reviewing hedging levels and the ability to manage leverage and new collateral requirements.

“Another area of focus should be testing the strategy, with a view to rebalancing or resettling it”, Torry explained, which could "include issues of diversification, balancing the risk and return of assets with funding level volatility and meeting cashflows needs while avoiding idle cash balances."

This sentiment was echoed by Hymans Robertson head of DB pensions, Susan McIlvouge, who stated: “For trustees, attention should be turning to reviewing collateral waterfalls, investment strategies and funding plans.

“With many schemes in a position where their actual asset allocation bears limited resemblance to their strategic benchmark, testing and rebalancing (or indeed resetting), strategy will be important.”

However, McIlvouge also clarified that, “whatever might have happened to a scheme‘s technical provisions funding position”, it is likely that, in 2023, funding on an insurance buyout basis will have improved significantly.

“This means that many schemes may find that buy-out affordability is now much closer than expected,” she explained. “Those thinking about doing a partial buy-in will need to reassess plans and available capital in light of investment strategy discussions.

“Whilst schemes can’t insure liabilities overnight, irrespective of how well funded they may be, if buyout is now within reach there’s no better time to start preparing. As well as looking to lock-in gains, trustees should also consider pushing on with buyout ‘readiness’ actions."

The defined contribution (DC) space will also have new challenges, as Hymans Robertson head of DC consulting, Mark Jaffray, pointed out that trust-based DC schemes will need to “get to grips” with The Pension Regulator's new Single Code of Practice as it comes into force.

Jaffray highlighted a number of specific challenges around the code, such as navigating overlap with the chair statement, clarity over exemptions for master trusts and whether the substance is genuinely being covered elsewhere, and truly understanding what an “own risk assessment” is all about.

Jaffray also raised hopes that 2023 will be “the year that a member outcome focus is cemented into the DC workplace market”, arguing that “it will be key that the pensions industry finds ways to remind members of the value of long-term pension savings” given the ongoing cost-of-living crisis .

“Ongoing trends such as consolidation into master trusts, and an emphasis on sustainable investing, will continue at pace,” he added, stressing the need for value, rather than costs, to drive decision making given the potential that exists to materially improve outcomes.

“I am also hopeful that more hybrid decumulation investment strategies are developed to better match the needs of those reaching retirement now,” he stated.

“With the introduction of these more complex options, however, we will need to see the evolution of education and support. There has been slow innovation in digital strategies to help inform and engage members, so I would like to see the pace of this innovation ramp up through 2023.”

Hymans Robertson also outlined specific predictions for Local Government Pension Schemes (LGPS), noting that whilst the end of 2022 means the valuation year will draw to a close, there will still be various “sweep-up actions”, and 2023 may afford time to consider areas of strategy and risk management such as employer-level investment strategies and enhanced exit planning for employers close to exit.

Hymans Robertson head of LGPS consulting, Catherine McFadyen, continued: “Meanwhile in Scotland, the valuations are just beginning and there will be significant decisions for funds to make around the balance of investment risk, employers’ contributions and funding prudence.

“Whilst it’s not what many want to hear, we foresee high inflation and ongoing market volatility as likely to continue in 2023. LGPS funds will need to think about how they monitor and manage these risks, particularly for employers with shorter-term time horizons and those with weaker financial covenants.

“We may start to see the recent new flexibility powers being used in these situations and formal monitoring arrangements, supported by digital technology, being put in place.”

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