U.K. companies are eying ways to offload the management of their defined benefit pensions, as unmet liabilities continue to put a strain on corporate balance sheets.
As of last June, the average U.K. defined benefit scheme was 88.7 percent funded, according to a funding analysis by the Pensions Regulator. The regulator’s 2018 report is expected to come out at the end of this month.
Following the collapse of schemes including the pension of construction company Carillion, the U.K. government has proposed tighter regulation of corporate pensions.
Against this backdrop, trustees and investment managers polled by Willis Towers Watson said they expected to see more of their peers delegate pension responsibilities to external providers over the next five years.
Nearly three-quarters of trustees and 61 percent of pension managers said schemes were likely to outsource more administrative or secretarial functions. Meanwhile, 55 percent of trustees and 48 percent of pension managers believed the use of fiduciary managers, or outsourced CIOs, would become more common.
The latter option, in which investment decisions are delegated to an external consultant or OCIO firm, can provide “small- and medium-sized schemes with access to expertise and opportunities normally available only to the largest global asset owners,” according to Willis Towers Watson, which offers fiduciary management services.
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Another potential option emerging for U.K. companies seeking to outsource pension management is consolidation. According to the report, the British government is seeking to introduce commercial consolidators, who companies could pay to take their pension plans off their hands. In that sense, consolidation would be like a cheaper, albeit riskier, version of a pension risk transfer.
The pensions taken over by commercial consolidators would then be pooled into larger funds, similar to the new public pension pools forming around the U.K.
Just under half of pension managers and about 43 percent of trustees surveyed by Willis Towers Watson said they believed consolidation would “significantly” improve the efficiency of defined benefit pensions in the U.K. Less than a quarter of all respondents viewed it as a negative development.
In addition, 38 percent of trustees and 23 percent of pension managers said they thought consolidation vehicles would appeal “very strongly” to most plan sponsors.
Still, survey respondents were not confident about their ability to judge whether consolidation would make sense for their employees. Just over a quarter of trustees and 16 percent of pension managers said their plan’s trustees would feel comfortable making that decision.
