Professional trustees of defined benefit (DB) schemes are grappling to balance risk and growth, with a growing divergence in hedging ratios and growth allocations, research from Charles Stanley Fiduciary Management has found.

The survey found that nearly half (48 per cent) of professional DB trustees have a higher hedge ratio than funded ratio, showing hesitation to take on interest rate risk.

Whilst Charles Stanley Fiduciary Management acknowledged that it is an industry consensus that a standard strategic hedge ratio should be equal to a scheme’s funding ratio, according to the survey, this is true for fewer than half of schemes.

Medium-sized schemes (£100m-£500m under management) were most likely to have a hedge ratio equal to their scheme’s funding ratio, while smaller and large schemes were both pursuing higher hedge ratios than their funding one, indicating a desire to reduce volatility and long-term risk.

In particular, the survey found that 45 per cent of medium schemes had a strategic hedge ratio equal to the funded ratio, compared to 29 per cent of small schemes and 30 per cent of large schemes (more than £500m under management).

This comes amid “notable changes” in behaviour over the past year, as the research revealed that around half of trustees across all scheme sizes have increased their hedging ratio since 2023.

According to the survey, 49 per cent of small schemes increased their hedging ratio, rising to 51 per cent amongst large schemes and 57 per cent amongst medium schemes.

In contrast, just over a third (36 per cent) of large schemes (more than £500m under management) cut their hedge ratio, falling to 27 per cent amongst both smaller and medium schemes.

But despite these higher-than-expected hedging ratios, the research also identified an appetite for investment growth and a shift towards UK equities, especially among medium schemes.

Nearly two thirds (61 per cent) of professional trustees said they have invested in a higher proportion of equities in their medium-sized scheme, while 30 per cent stayed flat and less than a tenth (9 per cent) reduced their allocation.

Larger schemes were less likely to invest in equities, as 30 per of professional trustees of large schemes had invested a higher proportion of equities, while 57 per cent said their investment in equities has stayed flat, and 13 per cent have lowered equity exposure.

Small schemes were again found to be mimicking the behaviour of large schemes, not medium ones; 35 per cent increased their equity investments, 46 per cent stayed flat, and 19 per cent de-risked and reduced their equity allocation.

Growth and higher returns were also key objectives for trustees, with more than two thirds (67 per cent) medium sized schemes highlighting this as their key investment objective, alongside 59 per cent of small-sized schemes and 55 per cent of large sized schemes.

Stability was more important for smaller schemes though, cited as a key objective by 29 per cent of small scheme professional trustees, compared to 15 per cent and 12 per cent for large and medium sized schemes respectively.

Commenting on the findings, Charles Stanley Fiduciary Management senior portfolio manager, Barnaby Low, said: “In a changing environment, many trustees are revising their long-term funding targets, while others have not yet set them.

“In this context, we are seeing divergence in hedging ratios and growth allocations.

"Some schemes will be trying to lock in recent funding gains and transition to a low-risk position, while others are looking to maintain a significant allocation to growth assets in order to generate a surplus that could be used to enhance benefits, fund a DC section or be shared with the employer.”

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