In brief
- UK DB schemes have experienced material improvements in funding as a result of higher interest rates, yet face significant challenges in liquidity following the liability-driven investment (LDI) crisis.
- Looking ahead we find ourselves in a new investment regime with higher inflation and interest rates, more positive stock-bond correlation, and an increased risk of recession.
- Many UK DB pension schemes are on the path to buyout and are looking to more closely align their investment strategy to asset classes that are viewed favourable by insurers regulated under the Solvency II Matching Adjustment.
- This will enable pension schemes to pay the buyout premium through an in-specie transfers of assets and reduce potential haircuts applied by the insurer.
- Schemes may also be able to harvest liquidity premium in cash flow-driven investment strategies to improve funding stability.
Investment actions to consider today
We propose three immediate actions UK DB schemes can consider to reposition their investment portfolios for this new market environment.
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- Immediate actions for UK pension schemes
- Case studies for investing in a new regime
- Environmental, social and governance (ESG) considerations
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