Pension scheme trustees should avoid a ‘”knee-jerk reaction” following recent market volatility, and instead ensure that they are properly prepared before approaching the insurer market, LCP has said.

Defined benefit (DB) pension scheme funding levels saw significant improvements amid the market volatility in September, primarily due to an unprecedented increase in gilt yields following the Chancellor's mini-Budget on 23 September.

Industry experts have encouraged trustees to lock in these funding improvements where possible, with concerns that insurers will not be able to handle all of the upcoming requests from schemes.

Indeed, LCP argued that schemes have a lot of work to do to make sure they are "at the front of the queue" for deals with insurers, noting that, even before the surge in yields, activity levels in the de-risking market were significantly up in H1 2022 compared with the same period in 2021.

The consultancy explained that schemes who have already transacted a buy-in and have capacity in their investment strategy can move quickly to extend the existing buy-in and lock into pricing opportunities, particularly where an umbrella contract.

However, it clarified that there is typically a 6-month plus lead in time for schemes yet to transact, stressing that, in the current market, it is more important than ever to do the right preparation, or else insurers will focus their limited resources on other more attractive opportunities.

In particular, LCP suggested that trustees should undertake a review of their investment strategy and hedging arrangements, ensuring they can meet any collateral needs and consider adjustments to lock in recent gains.

It also encouraged trustees to put the right governance in place for a de-risking transaction, and to prepare benefit specifications, data extracts and collection of marital information, highlighting these as "essential" to a successful transaction.

LCP partner, Charlie Finch, stated: "If markets stabilise at current levels then many pension schemes may find themselves sitting on big funding improvements compared to even a month ago.

“This could lead to a bonanza for de-risking markets next year as schemes seek to lock in the good news through buy-ins and full buyouts and potentially some of the emerging solutions such as superfunds.

“But I would warn against a knee-jerk reaction. For most schemes, there is much that they will want to do ahead of approaching insurers to lock into the attractive de-risking terms.

“This involves really thinking through their strategy to market so they are fully prepared, including having undertaken the necessary data and benefit work, properly considered the structure including around residual risks and having good governance structures in place.

“Schemes should not underestimate the importance of a well-run process that takes everyone involved on what is probably the biggest step on any scheme’s journey.”

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