More than half (56 per cent) of professional defined benefit (DB) pension scheme trustees have changed their funding target over the past year, research from Charles Stanley Fiduciary Management (CSFM) has shown.

The firm noted that this increased activity in switching targets was driven by volatility in the financial markets amid high inflation and interest rates.

Nearly two in five (39 per cent) professional DB scheme trustees had set long-term funding targets, up from 24 per cent in 2022.

While trustees were making headway on setting long-term funding targets, upcoming regulatory requirements will likely result in this becoming a priority for trustees to finalise.

More than a third (37 per cent) of professional DB trustees said that although they had not set a long-term funding target, they planned to do so over the next 12 months, while 21 per cent expect to do so within the next 12-24 months.

Self-sufficiency was the top choice of long-term funding target, with 43 per cent selecting it or likely to choose it, followed by buyout (28 per cent) and superfund consolidation (28 per cent).

Buyout had become a less popular option, with 34 per cent of professional trustees having it or planning to have it as their long-term funding target in 2022.

Of those who selected superfund consolidation last year, 44 per cent had moved away from this option, while 28 per cent had switched from buyout and self-sufficiency.

CSFM also found that there was a steady trend of professional DB trustees’ appetites for investment risk increasing, with 75 per cent saying it grew over the past 12 months.

This compared to 69 per cent in 2022 and 47 per cent in 2021.

Over eight in 10 (81 per cent) respondents said their appetite for interest rate risk had risen over the year and 75 per cent said their inflation risk appetite had increased.

Trustees were also found to have adjusted their scheme’s exposure to certain assets over the past 12 months, with 54 per cent and 46 per cent increasing their exposure to global equities and fixed income respectively.

“It is reassuring to see that trustees are making good progress towards setting formal long-term funding targets, even though the timescale for the regulatory requirement to do so keeps getting pushed back,” commented CSFM senior portfolio manager, Bob Campion.

He continued: “We have been encouraging our clients to have informal long-term targets for the purpose of their investment strategy for over a decade now!

“The increased focus on buyout, ahead of superfunds and self-sufficiency, is not surprising as buyout deficits have fallen across the industry. We’ve seen many clients move into our buyout aware strategies, keen to take advantage of the higher yields now available. I have no doubt this trend will continue.

“The desire of trustees to take more investment risk is perhaps at odds with the trend towards focusing on long-term targets and buyout. For most schemes, reducing risk rather than increasing it is more likely to be the order of play, especially with the yields available on low-risk assets now much higher than any time in the last decade. This is a trend playing out across the institutional investment landscape; as ever, a diversified multi-asset approach is a worthwhile focus."

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