De-risking continues to be the dominant theme in the asset allocation strategies of defined benefit (DB) schemes, despite growing interest in run-on opportunities, research from Aon has revealed.

The survey found that the proportion of UK DB pension schemes aiming for buyout as soon as it is affordable has decreased slightly from 2023, falling from 55 per cent to 52 per cent.

At the same time, schemes targeting run-on has increased from 30 per cent to 40 per cent, with the timescale to achieving the chosen target also reducing to 6.5 years.

This comes amid growing focus on options for DB run-on, with upcoming changes to the rules surrounding DB surpluses expected to provide new options for trustees to consider.

Aon associate partner, Rupert Kotowski, explained that significant improvements in funding levels since 2022 have also led to an increased focus on endgame strategies, which has in turn led to an increase in the range of available endgame options, from third-party solutions such as superfunds and pension captives to in-scheme options, such as active run-on.

"However, buying out as soon as affordable remains the most popular long-term strategy, with the insurance market remaining buoyant," he clarified.

This is most clearly seen in allocations, as Aon partner, Lucy Barron, explained: “Derisking continues to be the dominant theme in the asset allocation decisions of DB schemes, with the objective and timeframe for this becoming key determinants of the investment strategy.

"With this in mind, the survey shows that credit, liability-driven investment and annuities are again the asset classes where respondents intend to increase allocations.

“This reflects both derisking, shortening timescales, and risk settlement journeys - but the pace of that change has slowed from two years ago. This is partly due to the extent of derisking that has already taken place but also to market conditions.”

However, Barron said that one of the most notable exceptions to this slowing pace of de-risking is the marked increase in schemes planning to disinvest from illiquid growth assets.

Currently, 42 per cent of schemes expect to reduce their holdings in these assets, a notable rise from 35 per cent in 2023.

“It is likely that this shift is driven by the growing number of schemes preparing for annuity purchases,” she stated.

“However, despite this overall move towards derisking, there remains a minority - 5 per cent of respondents - that plan to increase their allocations to illiquid growth assets.

“This suggests that some schemes, particularly those pursuing a run-on strategy, continue to see value in maintaining or selectively increasing their exposure to illiquids rather than targeting buy-in.”

Environmental, social and governance (ESG) issues also remained a key focus, as Aon found that, despite changing priorities in the US, UK respondents still indicated a significant desire to change portfolios to both take advantage of ESG opportunities and to guard against ESG risks.

Indeed, at least 50 per cent of equity and credit portfolios now either incorporate an ESG focus, or are planning to incorporate an ESG focus for their investments in these asset classes.

“In the area of credit, 24 per cent of respondents plan to implement a higher ESG focus. This tallies with Aon’s recent experience that investors now prefer including ESG factors when derisking and reshaping credit portfolios,” Baron stated.

These same decisions are increasingly being outsourced, however, as Aon found that 38 per cent of respondents now delegate investment decisions through a fiduciary or Outsourced Chief Investment Officer (OCIO) model.

Kotowski said: “In a world of ever-increasing regulation and demands on trustees, there is a potential advantage in freeing up valuable governance time by delegating investment structure and asset management responsibilities to a third party.

“But it is also an area that is increasingly competitive. We have seen a number of larger pension schemes reconsidering the approach they take to delegation and the partner they use, particularly as they prepare for the next phase of their journey.”

---