Isio Quarterly Archives - Isio

Isio Quarterly February 2026

Daniel Owen — Tue, 10 Feb 2026 15:31:22 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Changes since 30 September 2025

Commentary over the quarter

Gilt yields have decreased by c. 30 basis points.

Inflation expectations have reduced slightly.

Credit spreads have narrowed by c. 2 basis points at most durations, which we expect will have a negligible impact on accounting positions.

Global equity markets were up by c. 3-4% over Q4 2025, but this wasn’t sufficient to fully offset the increase in liability values from reduced bond yields, so schemes with higher equity exposures may have seen their funding levels dip slightly.

Insurer appetite continues to be strong going into the new year. The PRA has sent correspondence to insurers around the need to maintain pricing discipline and risk management standards, so we may see pricing harden, despite increased competition.

New year – new opportunities?

Background
Value across almost all traditional asset classes is hard to find, despite regular – often geopolitically induced – volatility. Many equity markets are at or close to all-time highs, and in most sectors credit spreads are at multi-decade lows, with both priced for perfection. Given this background, it can appear challenging for investors to identify compelling opportunities. This isn’t just a dilemma for growth-seeking portfolios. De-risking schemes face their own conundrum, with “safe” assets such as corporate bonds now carrying premium valuations. This could drive additional prudence into actuarial assumptions.

Isio’s view

Corporate bonds – often the bedrock of de-risking strategies, due to their interest rate sensitivity, cash flow generation and high credit quality – now present schemes with a risk. Spreads have contracted to levels that seemingly ignore default risk almost entirely. Rather than de-risking, allocating at today’s spreads could be seen as re-risking. The critical question isn’t whether to hold corporate bonds, but when. Schemes can replace static allocation targets with dynamic triggers to avoid the current value trap and in the interim consider alternative asset classes outside of traditional markets where there is still value to be had. ‘Capital Call Finance’ and ‘Private Investment Grade Credit’ are two such opportunities, with an allocation to these areas seeking to provide added diversification at attractive risk-adjusted yields, while maintaining an Investment Grade focus.

Why it matters
Scheme funding has generally improved as rates have risen and growth assets have performed well. In an environment where it is challenging to identify good opportunities, there is a risk that this leads to inaction or inappropriate de-risking. Schemes are at risk of letting go of hard-won gains should credit spreads widen or equity markets fall.

November’s budget introduced two important changes for UK pension provision

Restrictions on salary sacrifice arrangements

The tax-efficient pension contributions employers and employees can make through salary sacrifice arrangements will be capped. Currently employers benefit from reduced National Insurance Contributions (NIC) by redirecting portions of salary into pensions, as sacrificed pay is exempt from employer NIC (15%). Under the new rules, which are due to come into effect in 2029, only the first £2,000 sacrificed annually qualifies for this relief increasing NIC for employers.

For an employee sacrificing £5,000 p.a. (basic rate taxpayer):

Now In 2029

Employer saving p.a. £750 £300

Employee saving p.a. £400 £160

For a mid-sized firm with 100 employees utilising salary sacrifice above the threshold, this could mean an average annual cost increase of £45,000 depending on participation rates and salary levels.

Employers may face tough choices: absorb higher NIC costs, limit pension contributions to the cap (potentially affecting employee retention), or restructure benefits. Sectors with high earners or generous pension schemes will feel the greatest impact. Proactive communication and financial planning will be critical to mitigate disruption to workforce well-being and long-term savings strategies. There are wider considerations to address the full impact which is outlined within our Budget 2026 Salary Sacrifice Checklist.

Lump sum DB surplus payments to members

It is currently highly tax inefficient to make lump sum payments to defined benefit (“DB”) members who are already receiving a pension. New legislation will make lump sum payments to members over minimum pension age “authorised”, so that they are instead taxed at the individual’s marginal rate (where DB schemes are in surplus on a low dependency basis). This should be enacted before the new wider surplus regime comes into force in late 2027.

Whilst sponsors of schemes that are running on may typically expect to receive most or all the surplus, this change is helpful because member shares of surplus can be used more efficiently. This may make it easier for trustees to agree to a higher overall employer share of surplus. Employers may also prefer enhancements that do not build-up additional DB risk.

A new route for sponsors to exit DB pensions while unlocking surplus value

Background

In December, investment manager Aberdeen announced a deal to effectively step in as sponsor of Stagecoach’s £1.2bn DB pension scheme, which was in surplus.

Stagecoach gets a clean break from its pension liabilities, while releasing some existing surplus funds for itself and scheme members.

Aberdeen will run the scheme on with a view to generating further surplus that it will share with members, while also managing the scheme’s assets.

Isio’s view

This solution will be of interest to those companies keen to be free of their UK DB pension exposure, with no desire to continue running the scheme for “profit” once it moves into surplus.

We are already seeing significant market interest. However, while Aberdeen is open to further deals, it has not clarified the scale of its ambition. Other similar asset management businesses may therefore see opportunities to develop similar offerings.

The structure will need scheme trustees who are willing to accept a move to a different sponsoring business and to forego any near-term opportunity to insure their members’ benefits. Realistically, not all will be of this view, despite the potential for members’ benefits to be enhanced in future.

Why it matters

For the right situations, this solution offers companies an attractive new option for removing their pension risks.

While the Stagecoach scheme was in surplus, we expect that transactions could be completed at no cost for those schemes not quite able to afford full insurance at present.

Furthermore, the scheme can potentially be passed to Aberdeen much more quickly than transferring it away under an insurance transaction – attractive in M&A situations especially.

Where’s your bank interest going?

Background

One of the most important functions of a Scheme Administrator is managing the trustee bank account on behalf of the trustee, and making sure there are sufficient funds to pay members’ benefits and scheme expenses.

Whilst it is the scheme’s money in these accounts, it is not uncommon for the interest on the money held in those accounts to be claimed – in part or completely – by the administrator.

Isio’s view

We believe all interest earned on the scheme’s money belongs to the trustee, and that’s the approach we apply on all of our administration appointments.

It has become clear that a number of administrators in the market retain the interest. This adds an additional cost to the administration services. What’s more, this isn’t always made clear when reviewing administration costs.

Why it matters

Whilst interest rates were low, this wasn’t too much of a concern. However, with interest rates now higher, this cost has increased – and can be more than the annual administration fee in some cases.

Trustees and sponsors should be clear on what happens to the interest currently, and factor it into decisions on administration reviews to ensure that overall costs remain in line with the market. It may be possible to re-negotiate the approach or even seek a refund of historic interest.

Cash flow management policies should also be reviewed where interest is currently not paid to the scheme, to ensure surplus funds aren’t left in the bank account.

If you’d like any support in considering your scheme administration, please contact jonathan.summerlin@isio.com

Market consolidation, regulatory momentum and the rise of CDC signal a turning point for DC pensions

Background

December saw a flurry of change within the DC pension provider market, with more expected.

This included:

WTW acquiring NatWest Cushon master trust;

Smart Pension completing the Options Workplace Pension Trust consolidation;

Aegon announcing a strategic review and potential sale of Aegon UK;

The unconnected multiple employer Collective Defined Contribution (CDC) regulations being finalised;

TPR publishing their draft updated CDC Code of Practice; and,

The Government’s consultation on Retirement CDC schemes closing.

Isio’s view

The Government’s continued push for consolidation is bearing fruit. These announcements are not a surprise given the number of ‘small’ providers in the market, and the Pension Schemes Bill 2025 unveiling a £25bn AUM scale requirement by 2030. We expect providers with assets below £15bn to now be reviewing their options, with further consolidation being inevitable.

The final hurdles for making unconnected multiple employer CDC schemes are now in sight. TPR is on track to accept applications for authorisation from mid–2026. The first schemes could launch from early 2027.

Why it matters

Businesses choose the provider that best meets their needs and objectives. Consolidation may impact their ability to meet those objectives, and unique selling points can be lost. Provider reviews should look at meeting current needs, with a level of future-proofing – making sure any known future changes are satisfactory.

Multi-employer CDC schemes will allow employers and their staff to access the benefits of CDC – higher stable incomes with no investment decision making for members – using a scheme established by a third-party provider (similar to using an existing DC Master Trust).

Looking forward to next quarter

The next version of the CMI longevity projection model is due to be issued in March 2025. This update is expected to be a ‘business as usual’ approach and the CMI do not intend to consult on any changes.

Take a look at our 2026 investment themes paper.

Clara have been working on their offering for smaller schemes, which will be rolled out on a selective basis over the coming months to develop the solution.

Watch out for the release of the results of Isio’s Independent Pension Trustee survey.

Changes since 30 September 2025

Commentary over the quarter

Gilt yields have decreased by c. 30 basis points.

Inflation expectations have reduced slightly.

Credit spreads have narrowed by c. 2 basis points at most durations, which we expect will have a negligible impact on accounting positions.

Global equity markets were up by c. 3-4% over Q4 2025, but this wasn’t sufficient to fully offset the increase in liability values from reduced bond yields, so schemes with higher equity exposures may have seen their funding levels dip slightly.

Insurer appetite continues to be strong going into the new year. The PRA has sent correspondence to insurers around the need to maintain pricing discipline and risk management standards, so we may see pricing harden, despite increased competition.

New year – new opportunities?

Background
Value across almost all traditional asset classes is hard to find, despite regular – often geopolitically induced – volatility. Many equity markets are at or close to all-time highs, and in most sectors credit spreads are at multi-decade lows, with both priced for perfection. Given this background, it can appear challenging for investors to identify compelling opportunities. This isn’t just a dilemma for growth-seeking portfolios. De-risking schemes face their own conundrum, with “safe” assets such as corporate bonds now carrying premium valuations. This could drive additional prudence into actuarial assumptions.

Isio’s view

Corporate bonds – often the bedrock of de-risking strategies, due to their interest rate sensitivity, cash flow generation and high credit quality – now present schemes with a risk. Spreads have contracted to levels that seemingly ignore default risk almost entirely. Rather than de-risking, allocating at today’s spreads could be seen as re-risking. The critical question isn’t whether to hold corporate bonds, but when. Schemes can replace static allocation targets with dynamic triggers to avoid the current value trap and in the interim consider alternative asset classes outside of traditional markets where there is still value to be had. ‘Capital Call Finance’ and ‘Private Investment Grade Credit’ are two such opportunities, with an allocation to these areas seeking to provide added diversification at attractive risk-adjusted yields, while maintaining an Investment Grade focus.

Why it matters
Scheme funding has generally improved as rates have risen and growth assets have performed well. In an environment where it is challenging to identify good opportunities, there is a risk that this leads to inaction or inappropriate de-risking. Schemes are at risk of letting go of hard-won gains should credit spreads widen or equity markets fall.

November’s budget introduced two important changes for UK pension provision

Restrictions on salary sacrifice arrangements

The tax-efficient pension contributions employers and employees can make through salary sacrifice arrangements will be capped. Currently employers benefit from reduced National Insurance Contributions (NIC) by redirecting portions of salary into pensions, as sacrificed pay is exempt from employer NIC (15%). Under the new rules, which are due to come into effect in 2029, only the first £2,000 sacrificed annually qualifies for this relief increasing NIC for employers.

For an employee sacrificing £5,000 p.a. (basic rate taxpayer):

Now In 2029

Employer saving p.a. £750 £300

Employee saving p.a. £400 £160

For a mid-sized firm with 100 employees utilising salary sacrifice above the threshold, this could mean an average annual cost increase of £45,000 depending on participation rates and salary levels.

Employers may face tough choices: absorb higher NIC costs, limit pension contributions to the cap (potentially affecting employee retention), or restructure benefits. Sectors with high earners or generous pension schemes will feel the greatest impact. Proactive communication and financial planning will be critical to mitigate disruption to workforce well-being and long-term savings strategies. There are wider considerations to address the full impact which is outlined within our Budget 2026 Salary Sacrifice Checklist.

Lump sum DB surplus payments to members

It is currently highly tax inefficient to make lump sum payments to defined benefit (“DB”) members who are already receiving a pension. New legislation will make lump sum payments to members over minimum pension age “authorised”, so that they are instead taxed at the individual’s marginal rate (where DB schemes are in surplus on a low dependency basis). This should be enacted before the new wider surplus regime comes into force in late 2027.

Whilst sponsors of schemes that are running on may typically expect to receive most or all the surplus, this change is helpful because member shares of surplus can be used more efficiently. This may make it easier for trustees to agree to a higher overall employer share of surplus. Employers may also prefer enhancements that do not build-up additional DB risk.

A new route for sponsors to exit DB pensions while unlocking surplus value

Background

In December, investment manager Aberdeen announced a deal to effectively step in as sponsor of Stagecoach’s £1.2bn DB pension scheme, which was in surplus.

Stagecoach gets a clean break from its pension liabilities, while releasing some existing surplus funds for itself and scheme members.

Aberdeen will run the scheme on with a view to generating further surplus that it will share with members, while also managing the scheme’s assets.

Isio’s view

This solution will be of interest to those companies keen to be free of their UK DB pension exposure, with no desire to continue running the scheme for “profit” once it moves into surplus.

We are already seeing significant market interest. However, while Aberdeen is open to further deals, it has not clarified the scale of its ambition. Other similar asset management businesses may therefore see opportunities to develop similar offerings.

The structure will need scheme trustees who are willing to accept a move to a different sponsoring business and to forego any near-term opportunity to insure their members’ benefits. Realistically, not all will be of this view, despite the potential for members’ benefits to be enhanced in future.

Why it matters

For the right situations, this solution offers companies an attractive new option for removing their pension risks.

While the Stagecoach scheme was in surplus, we expect that transactions could be completed at no cost for those schemes not quite able to afford full insurance at present.

Furthermore, the scheme can potentially be passed to Aberdeen much more quickly than transferring it away under an insurance transaction – attractive in M&A situations especially.

Where’s your bank interest going?

Background

One of the most important functions of a Scheme Administrator is managing the trustee bank account on behalf of the trustee, and making sure there are sufficient funds to pay members’ benefits and scheme expenses.

Whilst it is the scheme’s money in these accounts, it is not uncommon for the interest on the money held in those accounts to be claimed – in part or completely – by the administrator.

Isio’s view

We believe all interest earned on the scheme’s money belongs to the trustee, and that’s the approach we apply on all of our administration appointments.

It has become clear that a number of administrators in the market retain the interest. This adds an additional cost to the administration services. What’s more, this isn’t always made clear when reviewing administration costs.

Why it matters

Whilst interest rates were low, this wasn’t too much of a concern. However, with interest rates now higher, this cost has increased – and can be more than the annual administration fee in some cases.

Trustees and sponsors should be clear on what happens to the interest currently, and factor it into decisions on administration reviews to ensure that overall costs remain in line with the market. It may be possible to re-negotiate the approach or even seek a refund of historic interest.

Cash flow management policies should also be reviewed where interest is currently not paid to the scheme, to ensure surplus funds aren’t left in the bank account.

If you’d like any support in considering your scheme administration, please contact jonathan.summerlin@isio.com

Market consolidation, regulatory momentum and the rise of CDC signal a turning point for DC pensions

Background

December saw a flurry of change within the DC pension provider market, with more expected.

This included:

WTW acquiring NatWest Cushon master trust;

Smart Pension completing the Options Workplace Pension Trust consolidation;

Aegon announcing a strategic review and potential sale of Aegon UK;

The unconnected multiple employer Collective Defined Contribution (CDC) regulations being finalised;

TPR publishing their draft updated CDC Code of Practice; and,

The Government’s consultation on Retirement CDC schemes closing.

Isio’s view

The Government’s continued push for consolidation is bearing fruit. These announcements are not a surprise given the number of ‘small’ providers in the market, and the Pension Schemes Bill 2025 unveiling a £25bn AUM scale requirement by 2030. We expect providers with assets below £15bn to now be reviewing their options, with further consolidation being inevitable.

The final hurdles for making unconnected multiple employer CDC schemes are now in sight. TPR is on track to accept applications for authorisation from mid–2026. The first schemes could launch from early 2027.

Why it matters

Businesses choose the provider that best meets their needs and objectives. Consolidation may impact their ability to meet those objectives, and unique selling points can be lost. Provider reviews should look at meeting current needs, with a level of future-proofing – making sure any known future changes are satisfactory.

Multi-employer CDC schemes will allow employers and their staff to access the benefits of CDC – higher stable incomes with no investment decision making for members – using a scheme established by a third-party provider (similar to using an existing DC Master Trust).

Looking forward to next quarter

The next version of the CMI longevity projection model is due to be issued in March 2025. This update is expected to be a ‘business as usual’ approach and the CMI do not intend to consult on any changes.

Take a look at our 2026 investment themes paper.

Clara have been working on their offering for smaller schemes, which will be rolled out on a selective basis over the coming months to develop the solution.

Watch out for the release of the results of Isio’s Independent Pension Trustee survey.

Subscribe to IQ

Your opportunity to provide feedback on IQ

It has been one year since we launched IQ with the purpose of sharing a quarterly reflective analysis and forward look ahead. We would appreciate a couple of minutes of your time to complete this anonymous short survey to help us ensure we maximise the value of IQ for our readers.

Provide your feedback

Join our mailing list

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The post Isio Quarterly February 2026 appeared first on Isio.

Isio Quarterly October 2025

patrickmckay — Tue, 21 Oct 2025 06:00:00 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update Implications of high gilt yields Modern DB endgame analysis The DB Funding Code: a year on Two helpful Pension Schemes Bill changes Looking forward to next quarter

Changes since 30 June 2025

Commentary over the quarter

Gilt yields have increased by c. 25 basis points.

Inflation expectations are broadly unchanged.

Credit spreads have narrowed by c. 2 basis points at most durations, which we expect will have a negligible impact on accounting positions.

Global equity markets were up by c. 9-10% over Q3 2025, driving funding improvements.

Insurer appetite continues to be strong going into Q4 – albeit demand may vary depending on the insurer and whether they have already filled their pipeline or not.

Gilt yields rose sharply over 2022 and have remained high since then (see graph below). This has several implications which sponsors of DB schemes should make sure they raise with their trustees.

Check when trustees last reviewed factors and ask for the next planned review to be brought forward where necessary.

If your scheme’s actuarial factors were set when gilt yields were lower, they may be too generous now. This could lead to a funding strain when members choose certain options, such as taking a cash lump sum at retirement or retiring early.

Reassess DB strategies and engage with trustees on implementation.

Liabilities have reduced by around a third since early 2022 for a typical DB scheme. Many sponsors have grown over the same period, potentially making new options available, for example, targeting risk settlement or gradual surplus release.

Engage with trustees to review hedging levels and consider segregated LDI if possible.

Whilst some speculate that gilt yields will revert to the lower levels seen before 2022, all major bond markets are under pressure from growing government debt levels. Given the uncertainty, we expect that fully hedged schemes will remain so and trustees and sponsors of underhedged schemes may seek to lock in gains by hedging more now. LDI arrangements have changed to avoid a repeat of 2022, but arguably for pooled LDI investors the changes protect the counterparties, with schemes being exposed to the same liquidity risks if they need to act quickly.

Background

Releasing surplus to sponsors will become easier from late 2027, meaning that some DB schemes will become an opportunity to create value for sponsors. Running on could unlock material value, but this needs to be carefully weighed against downside risks. TPR have recently released guidance on this subject.

Isio’s view

The risk-reward trade-offs are nuanced, and traditional deterministic projections give insufficient insight to make informed decisions. Modern stochastic modelling techniques can help sponsors and trustees be more sophisticated in evaluating options, for example, how likely is it that a sponsor will regret running on, rather than insuring their scheme at the earliest opportunity? We’ve developed a cost-effective way of using this type of modern analysis to help schemes and sponsors properly quantify their options – see the graph for an example of the output this can produce. So far, we’ve helped over 20 schemes with assets from £50m to £5 billion, and more information is available here.

Why it matters

Many schemes are at inflection points and trustees are looking for sponsors to set out their preferred strategy. Stakeholder views can vary widely between and within organisations, and corporate boards should be provided with the insight needed to make informed decisions.

Background

The DB Funding Code has now been in effect for a year and the first tranche of scheme valuations will be due by the end of 2025. Our recent funding survey of around 350 Isio clients gives insight to the direction of travel and key areas of focus.

Isio’s view

Some interesting statistics from our survey include:

61% of schemes surveyed were already in a surplus at their most recent valuation. The average scheme has then seen a 13% improvement in funding levels over the last three years.

53% of schemes expect to adopt Fast Track to comply with the new requirements, whilst 11% expect to go the Bespoke route and 36% of schemes are still unsure.

Larger schemes are more inclined to target run on in the long term whereas smaller schemes remain focussed on insurance buyout.

Larger schemes are also more likely to have an existing expense reserve than smaller schemes. For those schemes adopting a reserve, we’ve seen a wide range which can either fully or partially cover expenses (see graph). Making allowance for expenses is expected to increase under the new regime.

Why it matters

Companies should be actively engaging with their trustees on the first valuations under the new Funding Code.

In particular, companies should:

Make sure that the long-term objective is aligned to their strategic goals and doesn’t create any unnecessary cash risk.

Engage early with Trustees on future use of surplus.

Actively consider the Fast Track and Bespoke regulatory compliance routes.

Diligently review expense reserve allowances.

Don’t assume that a surplus means no company input is required. Please email your Isio contact if you would like a copy of the full funding survey report.

Background

The government is making two helpful changes to the Pension Schemes Bill:

The first change will allow Scheme Actuaries to provide a new confirmation for historic changes to the scheme, where actuarial certification is either missing or wasn’t recorded properly, helping resolve the Virgin Media issue.

The second change, expected in the next round of amendments to the bill, will remove the PPF admin levy, which follows the PPF’s announcement that it will not be charging the main PPF levy for this year (2025/26).

Isio’s view

Being able to provide an actuarial confirmation will help the industry to resolve the headache caused by missing or incomplete scheme documentation. Sensible legal and actuarial advice is needed to navigate this issue and some exceptions will apply. The move to a zero PPF levy this year and removing the PPF admin levy are positive steps. However, the PPF levy is not guaranteed to be zero in future.

Why it matters

Virgin Media issues have been causing headaches for accounting disclosures and risk settlement transactions since the ruling in 2023. The new changes largely help to resolve this issue, but do need to be worked through with the Trustee and Scheme Actuary.

The PPF’s funding position is in rude health. Removing high levy payments and the admin around them is positive for sponsors and trustees and gives a P&L benefit for sponsors, although this does not mean the PPF levies are gone for good.

Looking forward to next quarter

We will be hosting a breakfast event at the London Stock Exchange with David Smith as the guest speaker and an expert panel including DWP director Kerstin Parker on 17 November. This event is for senior finance leaders with responsibility for their organisation’s DB and DC schemes. Register here.

On 18 November, we will be hosting our Fiduciary Management Conference Live event on Zoom. Learn more and register here.

Keep an eye out for an email about our upcoming accounting webinar.

The Chancellor is expected to announce her Autumn budget on Wednesday 26 November. The press has speculated on the inclusion of several pensions related topics. We will be listening carefully to the content on Budget day and will let you know any implications in the next edition of IQ.

Changes since 30 June 2025

Commentary over the quarter

Gilt yields have increased by c. 25 basis points.

Inflation expectations are broadly unchanged.

Credit spreads have narrowed by c. 2 basis points at most durations, which we expect will have a negligible impact on accounting positions.

Global equity markets were up by c. 9-10% over Q3 2025, driving funding improvements.

Insurer appetite continues to be strong going into Q4 – albeit demand may vary depending on the insurer and whether they have already filled their pipeline or not.

Gilt yields rose sharply over 2022 and have remained high since then (see graph below). This has several implications which sponsors of DB schemes should make sure they raise with their trustees.

Check when trustees last reviewed factors and ask for the next planned review to be brought forward where necessary.

If your scheme’s actuarial factors were set when gilt yields were lower, they may be too generous now. This could lead to a funding strain when members choose certain options, such as taking a cash lump sum at retirement or retiring early.

Reassess DB strategies and engage with trustees on implementation.

Liabilities have reduced by around a third since early 2022 for a typical DB scheme. Many sponsors have grown over the same period, potentially making new options available, for example, targeting risk settlement or gradual surplus release.

Engage with trustees to review hedging levels and consider segregated LDI if possible.

Whilst some speculate that gilt yields will revert to the lower levels seen before 2022, all major bond markets are under pressure from growing government debt levels. Given the uncertainty, we expect that fully hedged schemes will remain so and trustees and sponsors of underhedged schemes may seek to lock in gains by hedging more now. LDI arrangements have changed to avoid a repeat of 2022, but arguably for pooled LDI investors the changes protect the counterparties, with schemes being exposed to the same liquidity risks if they need to act quickly.

Background

Releasing surplus to sponsors will become easier from late 2027, meaning that some DB schemes will become an opportunity to create value for sponsors. Running on could unlock material value, but this needs to be carefully weighed against downside risks. TPR have recently released guidance on this subject.

Isio’s view

The risk-reward trade-offs are nuanced, and traditional deterministic projections give insufficient insight to make informed decisions. Modern stochastic modelling techniques can help sponsors and trustees be more sophisticated in evaluating options, for example, how likely is it that a sponsor will regret running on, rather than insuring their scheme at the earliest opportunity? We’ve developed a cost-effective way of using this type of modern analysis to help schemes and sponsors properly quantify their options – see the graph for an example of the output this can produce. So far, we’ve helped over 20 schemes with assets from £50m to £5 billion, and more information is available here.

Why it matters

Many schemes are at inflection points and trustees are looking for sponsors to set out their preferred strategy. Stakeholder views can vary widely between and within organisations, and corporate boards should be provided with the insight needed to make informed decisions.

Background

The DB Funding Code has now been in effect for a year and the first tranche of scheme valuations will be due by the end of 2025. Our recent funding survey of around 350 Isio clients gives insight to the direction of travel and key areas of focus.

Isio’s view

Some interesting statistics from our survey include:

61% of schemes surveyed were already in a surplus at their most recent valuation. The average scheme has then seen a 13% improvement in funding levels over the last three years.

53% of schemes expect to adopt Fast Track to comply with the new requirements, whilst 11% expect to go the Bespoke route and 36% of schemes are still unsure.

Larger schemes are more inclined to target run on in the long term whereas smaller schemes remain focussed on insurance buyout.

Larger schemes are also more likely to have an existing expense reserve than smaller schemes. For those schemes adopting a reserve, we’ve seen a wide range which can either fully or partially cover expenses (see graph). Making allowance for expenses is expected to increase under the new regime.

Why it matters

Companies should be actively engaging with their trustees on the first valuations under the new Funding Code.

In particular, companies should:

Make sure that the long-term objective is aligned to their strategic goals and doesn’t create any unnecessary cash risk.

Engage early with Trustees on future use of surplus.

Actively consider the Fast Track and Bespoke regulatory compliance routes.

Diligently review expense reserve allowances.

Don’t assume that a surplus means no company input is required. Please email your Isio contact if you would like a copy of the full funding survey report.

Background

The government is making two helpful changes to the Pension Schemes Bill:

The first change will allow Scheme Actuaries to provide a new confirmation for historic changes to the scheme, where actuarial certification is either missing or wasn’t recorded properly, helping resolve the Virgin Media issue.

The second change, expected in the next round of amendments to the bill, will remove the PPF admin levy, which follows the PPF’s announcement that it will not be charging the main PPF levy for this year (2025/26).

Isio’s view

Being able to provide an actuarial confirmation will help the industry to resolve the headache caused by missing or incomplete scheme documentation. Sensible legal and actuarial advice is needed to navigate this issue and some exceptions will apply. The move to a zero PPF levy this year and removing the PPF admin levy are positive steps. However, the PPF levy is not guaranteed to be zero in future.

Why it matters

Virgin Media issues have been causing headaches for accounting disclosures and risk settlement transactions since the ruling in 2023. The new changes largely help to resolve this issue, but do need to be worked through with the Trustee and Scheme Actuary.

The PPF’s funding position is in rude health. Removing high levy payments and the admin around them is positive for sponsors and trustees and gives a P&L benefit for sponsors, although this does not mean the PPF levies are gone for good.

Looking forward to next quarter

We will be hosting a breakfast event at the London Stock Exchange with David Smith as the guest speaker and an expert panel including DWP director Kerstin Parker on 17 November. This event is for senior finance leaders with responsibility for their organisation’s DB and DC schemes. Register here.

On 18 November, we will be hosting our Fiduciary Management Conference Live event on Zoom. Learn more and register here.

Keep an eye out for an email about our upcoming accounting webinar.

The Chancellor is expected to announce her Autumn budget on Wednesday 26 November. The press has speculated on the inclusion of several pensions related topics. We will be listening carefully to the content on Budget day and will let you know any implications in the next edition of IQ.

Subscribe to IQ

Your opportunity to provide feedback on IQ

It has been one year since we launched IQ with the purpose of sharing a quarterly reflective analysis and forward look ahead. We would appreciate a couple of minutes of your time to complete this anonymous short survey to help us ensure we maximise the value of IQ for our readers.

Provide your feedback

Join our mailing list

Get the next issue of Isio Quarterly delivered straight to your inbox

Subscribe now

The post Isio Quarterly October 2025 appeared first on Isio.

Isio Quarterly August 2025

Daniel Owen — Thu, 17 Jul 2025 16:11:13 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update Pension Schemes Bill – DB Pension Schemes Bill – DC Mansion House Accord Pensions Commission launched Looking forward to next quarter

Change since 31 March 2025

Commentary over the quarter

Gilt yields have fallen at the shorter end of the yield curve and remained broadly flat at the longer end

Inflation expectations have fallen more materially, by c. 30 basis points at the shorter end and c. 10 basis points at the longer end of the yield curve

Credit spreads have narrowed by c. 6-8 basis points at most durations, thus accounting positions are likely to have worsened slightly

Global equity markets were up by c. 5% over Q2 2025, reversing similar losses over Q1 2025

New entrants in the insurance market are leading to more competitive pricing being observed for transactions

Background

In June, the UK Government published the Pension Schemes Bill 2025 which will impact every funded pension arrangement in the UK.

Releasing surplus to sponsors will become easier from late 2027 onwards and superfunds now have a statutory framework within which to develop. The PPF is now able to switch off levy payments. Separately, the Government is introducing legislation to help resolve uncertainties caused by the Virgin Media judgment.

Impacts on DC arrangements are covered in a separate section and more details are available in our webinar.

Isio’s view
The changes to DB surplus release rules and new Regulator guidance bring into sharp focus credible endgames such as a Purposeful Run On as an alternative to pursuing full insurance buy-out as quickly as possible. We are already seeing schemes and sponsors pause existing plans to consider their options and the potential value that can be unlocked for employers, employees and pension scheme members. We welcome these changes and look forward to the greater detail which will be published in due course.

Deciding whether to insure at the earliest opportunity or run on for surplus release over the medium to long term is a big decision. Running on could unlock material value for sponsors but this needs to be carefully weighed against downside risks.

Why it matters

Many employers and corporate boards are taking time to understand the options and pros and cons in detail and find the right strategy for their scheme – even though these reforms will take some time to implement. This is consistent with new TPR guidance. Getting an unbiased view (sometimes from a third party) and the availability of more powerful quantitative modelling can help make more informed decisions. Isio’s Karen Parker explores the opportunities available to finance leaders in respect of their DB schemes in this interview.

We also discussed the topic of surplus release with a group of senior executives from employers collectively sponsoring £50 billion of UK DB schemes. The main themes coming out of the round table are summarised here.

More details on the Pension Schemes Bill are covered in our quick response, on-demand webinar recording published in June.
Watch our Pension Schemes Bill webinar

Background

The UK’s 2025 Pension Schemes Bill introduces transformative DC market reforms, including:

A £25bn minimum AUM threshold for providers by 2030 to drive consolidation;

Reserve powers to mandate private market investments if voluntary Mansion House Accord pledges falter;

Bulk transfers for contract-based schemes without member consent; and,

Mandating default retirement options and tying reforms to a Value for Members framework, shifting focus from cost to performance.

Isio’s view

We are supportive of reforms in this space and believe consolidation can benefit many schemes and members However, in our view the £25bn minimum is unnecessary and smaller schemes can provide value too.

Private markets investing hasn’t been mandated, but we have some concern about the reserved powers. While in principle, private markets could lead to improved outcomes, poor implementation could do more harm than good.

Bulk transfers are a breakthrough for tackling legacy defaults, though independent oversight remains critical. We believe default retirement options require greater innovation beyond current market offerings to maximise the opportunity these reforms offer and make a real difference to member outcomes.

Why it matters

Consider when and how you might review your provider, what governance have in place, understand what is coming and look for the opportunities to improve outcomes for current and future employees without extra cost or risk.

In our latest interview with the Times, Richard Birkin explores the opportunities available to finance leaders in respect of their defined contribution schemes.

More details on the Pension Schemes Bill are covered in our quick response, on-demand webinar recording published in June.
Watch our Pension Schemes Bill webinar

Background

In May 2025, seventeen of the largest workplace pension providers in the UK signed a voluntary initiative, known as the Mansion House Accord, expressing their intent to invest at least 10% of their DC default funds in private markets by 2030, with 5% of the total allocated to the UK.

Isio’s view

The Mansion House Accord is another step in the right direction in encouraging DC schemes to consider investing in private market investments within their default arrangements. For too long, the market has focused on cost as opposed to value and it is exciting to see this mindset start to change.

Private markets have the ability to increase returns, allow more effective management of risk and enable sustainability to make a genuine difference. All of these are positive for members and should lead to better outcomes and more engagement.

Why it matters

There is however one potential spanner in the works. We are concerned that not enough heed is being paid to the effective implementation of private market allocations. Simply allocating does not give a guarantee of better outcomes. If it is done badly, it will likely lead to worse outcomes than what’s currently provided by existing defaults.

We would encourage all potential investors to challenge their providers, their advisers and the Government on the “how” when it comes to private markets implementation. Areas such as manager diversification, what UK investment actually looks like, speed of ramp-up, management of liquidity and the expertise of your advisor/provider can make a real difference. It’s all in the implementation!

Further insights on the DC Master Trust market

Background

Just in time for summer, the Government has announced a revived Pensions Commission to look at ways to prevent tomorrow’s pensioners being poorer than today’s. It will examine the pension system and look at what is required to build a future-proof system that is strong, fair and sustainable.

Isio’s view

We welcome the launch of the Pensions Commission and particularly its focus on inclusivity. There is a clear need to focus on ways to widen and deepen private retirement saving in the UK. The Commission will have the opportunity to weigh up the substantial body of research and evidence on savings and to give the Government a clear route to bridging the savings gap for current workers. Read our summary of the launch of the Pensions Commission as well as the review of the state pension age here.

Why It Matters
Finance leaders managing pension schemes must prepare for potential regulatory shifts addressing under-saving and inequality. We will keep you up to date as reforms progress. Isio can support firms by providing a review and identifying any challenges specific to your firm. We have seen an uptick in firms looking to address gaps through targeted support, such as financial coaching for early-career staff. Now is an ideal time to explore this as firms prepare to welcome their early-careers intake in September.
Learn more about financial coaching

As well as launching the rebirth of the Pensions Commission, the Government has also announced the formal review of State Pension Age which will have ramifications for employers, schemes and employees in due course — read more here. As well as this, we will update you on what the Pension Schemes Bill could mean in practise for sponsors and schemes as this progresses through Parliament.

Change since 31 March 2025

Commentary over the quarter

Gilt yields have fallen at the shorter end of the yield curve and remained broadly flat at the longer end

Inflation expectations have fallen more materially, by c. 30 basis points at the shorter end and c. 10 basis points at the longer end of the yield curve

Credit spreads have narrowed by c. 6-8 basis points at most durations, thus accounting positions are likely to have worsened slightly

Global equity markets were up by c. 5% over Q2 2025, reversing similar losses over Q1 2025

New entrants in the insurance market are leading to more competitive pricing being observed for transactions

Background

In June, the UK Government published the Pension Schemes Bill 2025 which will impact every funded pension arrangement in the UK.

Releasing surplus to sponsors will become easier from late 2027 onwards and superfunds now have a statutory framework within which to develop. The PPF is now able to switch off levy payments. Separately, the Government is introducing legislation to help resolve uncertainties caused by the Virgin Media judgment.

Impacts on DC arrangements are covered in a separate section and more details are available in our webinar.

Isio’s view
The changes to DB surplus release rules and new Regulator guidance bring into sharp focus credible endgames such as a Purposeful Run On as an alternative to pursuing full insurance buy-out as quickly as possible. We are already seeing schemes and sponsors pause existing plans to consider their options and the potential value that can be unlocked for employers, employees and pension scheme members. We welcome these changes and look forward to the greater detail which will be published in due course.

Deciding whether to insure at the earliest opportunity or run on for surplus release over the medium to long term is a big decision. Running on could unlock material value for sponsors but this needs to be carefully weighed against downside risks.

Why it matters

Many employers and corporate boards are taking time to understand the options and pros and cons in detail and find the right strategy for their scheme – even though these reforms will take some time to implement. This is consistent with new TPR guidance. Getting an unbiased view (sometimes from a third party) and the availability of more powerful quantitative modelling can help make more informed decisions. Isio’s Karen Parker explores the opportunities available to finance leaders in respect of their DB schemes in this interview.

We also discussed the topic of surplus release with a group of senior executives from employers collectively sponsoring £50 billion of UK DB schemes. The main themes coming out of the round table are summarised here.

More details on the Pension Schemes Bill are covered in our quick response, on-demand webinar recording published in June.
Watch our Pension Schemes Bill webinar

Background

The UK’s 2025 Pension Schemes Bill introduces transformative DC market reforms, including:

A £25bn minimum AUM threshold for providers by 2030 to drive consolidation;

Reserve powers to mandate private market investments if voluntary Mansion House Accord pledges falter;

Bulk transfers for contract-based schemes without member consent; and,

Mandating default retirement options and tying reforms to a Value for Members framework, shifting focus from cost to performance.

Isio’s view

We are supportive of reforms in this space and believe consolidation can benefit many schemes and members However, in our view the £25bn minimum is unnecessary and smaller schemes can provide value too.

Private markets investing hasn’t been mandated, but we have some concern about the reserved powers. While in principle, private markets could lead to improved outcomes, poor implementation could do more harm than good.

Bulk transfers are a breakthrough for tackling legacy defaults, though independent oversight remains critical. We believe default retirement options require greater innovation beyond current market offerings to maximise the opportunity these reforms offer and make a real difference to member outcomes.

Why it matters

Consider when and how you might review your provider, what governance have in place, understand what is coming and look for the opportunities to improve outcomes for current and future employees without extra cost or risk.

In our latest interview with the Times, Richard Birkin explores the opportunities available to finance leaders in respect of their defined contribution schemes.

More details on the Pension Schemes Bill are covered in our quick response, on-demand webinar recording published in June.
Watch our Pension Schemes Bill webinar

Background

In May 2025, seventeen of the largest workplace pension providers in the UK signed a voluntary initiative, known as the Mansion House Accord, expressing their intent to invest at least 10% of their DC default funds in private markets by 2030, with 5% of the total allocated to the UK.

Isio’s view

The Mansion House Accord is another step in the right direction in encouraging DC schemes to consider investing in private market investments within their default arrangements. For too long, the market has focused on cost as opposed to value and it is exciting to see this mindset start to change.

Private markets have the ability to increase returns, allow more effective management of risk and enable sustainability to make a genuine difference. All of these are positive for members and should lead to better outcomes and more engagement.

Why it matters

There is however one potential spanner in the works. We are concerned that not enough heed is being paid to the effective implementation of private market allocations. Simply allocating does not give a guarantee of better outcomes. If it is done badly, it will likely lead to worse outcomes than what’s currently provided by existing defaults.

We would encourage all potential investors to challenge their providers, their advisers and the Government on the “how” when it comes to private markets implementation. Areas such as manager diversification, what UK investment actually looks like, speed of ramp-up, management of liquidity and the expertise of your advisor/provider can make a real difference. It’s all in the implementation!

Further insights on the DC Master Trust market

Background

Just in time for summer, the Government has announced a revived Pensions Commission to look at ways to prevent tomorrow’s pensioners being poorer than today’s. It will examine the pension system and look at what is required to build a future-proof system that is strong, fair and sustainable.

Isio’s view

We welcome the launch of the Pensions Commission and particularly its focus on inclusivity. There is a clear need to focus on ways to widen and deepen private retirement saving in the UK. The Commission will have the opportunity to weigh up the substantial body of research and evidence on savings and to give the Government a clear route to bridging the savings gap for current workers. Read our summary of the launch of the Pensions Commission as well as the review of the state pension age here.

Why It Matters
Finance leaders managing pension schemes must prepare for potential regulatory shifts addressing under-saving and inequality. We will keep you up to date as reforms progress. Isio can support firms by providing a review and identifying any challenges specific to your firm. We have seen an uptick in firms looking to address gaps through targeted support, such as financial coaching for early-career staff. Now is an ideal time to explore this as firms prepare to welcome their early-careers intake in September.
Learn more about financial coaching

As well as launching the rebirth of the Pensions Commission, the Government has also announced the formal review of State Pension Age which will have ramifications for employers, schemes and employees in due course — read more here. As well as this, we will update you on what the Pension Schemes Bill could mean in practise for sponsors and schemes as this progresses through Parliament.
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The post Isio Quarterly August 2025 appeared first on Isio.

Isio Quarterly April 2025

Daniel Owen — Thu, 24 Apr 2025 13:34:34 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update Investment market volatility Utilising DB Surplus Insurance market update CMI 2024 Looking forward to next quarter

Change since 31 December 2024

Commentary over the quarter

Gilt yields have risen by c. 10-15 basis points, with long-term inflation expectations broadly unchanged.

Credit spreads have increased by c. 10 basis points – thus accounting positions are likely to have improved.

Global equity markets were down by c. 4-5%.

Anticipated insurer discount rates are up by 15-20 basis points, exceeding increases in gilt yields. This should improve buyout funding positions for most schemes, other than those with material equity holdings.

Since 31 March 2025 there has been significant market volatility following the introduction of Tariffs, with both equity sell-offs and increases in bond yields. Our article in this quarter’s IQ explores what Sponsors should do in response. If you have any questions regarding the current volatility please reach out to your usual Isio contact.

President Trump puts the IF in Tariffs

Background

“Liberation Day” has brought a rollercoaster ride for the equity and bond markets, with significant falls and jumps on a daily basis depending on the latest newsflow.

Isio’s view

In our view if full-fat tariffs are reimposed with de-globalisation following, markets could fall further still and volatility would be significant. Even with a full reversal in trade policy, we still expect a material slowdown in global growth as business and consumer confidence falters due to the uncertainty.

Our 2025 investment themes remain valid today. Investors still have the chance to take profits on growth assets and prepare dry powder for a better environment to deploy risk – please see link for a summary of our investment themes.

Why it matters

Trustee advisers should be actively monitoring the situation, but considerations for pension scheme sponsors are:

Understand the immediate implications for cash funding e.g. post valuation experience or triggers on contingent funding arrangements.

A scheme’s IAS / FRS basis may behave differently to its primary funding basis, typically having shorter duration (likely small mismatch and slight loss) and higher credit spread exposure (likely large mismatch and small gain).

The new Funding Code increases focus on sponsor covenant for pension scheme funding. For sectors particularly exposed to tariffs this may necessitate alterations to journey plans.

Whilst too early to know the implications, it is likely that insurance pricing and volumes will be impacted. Sponsors with schemes closing in on insurance should be aware of potential roadblocks, especially if cash has been promised to bridge any funding gap.

Keep a close eye on trustee governance arrangements: ensure that there is sufficient LDI collateral, seek speedy and concise communications on any strategy changes.

Investment themes for 2025

Utilising DB surplus

Background

On 28 January the Government confirmed that it will respond to the DB options consultation before the summer. This is expected to include reforms to encourage schemes to run on targeting surplus generation e.g. allowing trustees of all schemes to refund surplus to the employer irrespective of restrictions in scheme rules and potentially lowering the funding threshold for refunding surplus.

Isio’s view

It is a relief that the Pensions Bill will include reforms to make gradual surplus release easier. We are hopeful that the statutory override allowing surplus release will be wide enough to fully remove the current rules lottery and the funding and risk thresholds will be flexible enough to make gradual surplus release relatively common. Professional trustees’ views on the most important reforms to make surplus release more straightforward are shown opposite.

Given the uncertainty in the details and that the reforms may take a couple of years to enact, some employers are working with their trustees to benefit from surplus within existing legislation. In many cases using surplus to offset employer contributions to a DC section is the most viable option – Aberdeen, Aon and Schroders have recently adopted this approach.

Why it matters

Deciding whether to run on over the medium term or insure at the earliest opportunity will likely be the most important decision ever made for your schemes. Once trustees are working towards buy-out they may be reluctant to change course, so we recommend forming a company view and engaging with your trustees as soon as possible.
More insights from our scheme run on survey of professional trustees

New entrants in insurance market

Background

If we look back over the last 20 years, the number of providers in the market has been relatively stable.

Recently three new entrants have joined the insurance market (Royal London, Utmost and Blumont), increasing the level of capacity following the increase in demand in recent years.

Isio’s view

More insurers in the market leads to more competitive tension in transactions, and that can only be a good thing for sponsors, trustees and members of schemes. This has been especially true at the smaller end of the market, where insurer appetite can be limited at times.

Some of the newer entrants, particularly Royal London and Utmost, are quoting in that smaller end of the market. Blumont have also stated their intention to quote on schemes of all sizes, so really positive news. In order to win business, price alone is not always enough. Different schemes will have different priorities, different things they are concerned about or that are important, or even critical to them. The new entrants know this and are tailoring their offers accordingly.

Why it matters

We always advocate that insurers should only be asked to provide a quotation if the sponsor and the trustees would be willing to go ahead and transact with that insurer. With new entrants, a long track-record won’t be available.

We have seen new entrants be flexible on timing, make commitments that other insurers are not typically willing to do, and explore options of transacting with schemes that might have, for example, unusual or complex benefits, in order to get the transaction to go ahead. This gives the new entrants something which potentially makes them stand out from other insurers.

Why has the number of bulk annuity providers increased?

CMI 2024

Background

The annual update of the CMI’s model on future longevity improvements is due out shortly. A consultation on changes to this year’s model closed on 25 March 2025 with the updated model (CMI_2024) expected in Q2 2025.

The key change is a move away from the ‘weights’ parameters used in previous versions which allowed users to only reflect partial or no allowance for individual years impacted by COVID. Instead this will be replaced by an ‘overlay’ which allows the impact of COVID to tail—off over a period controlled by the user – driven by the new ‘half-life’ parameter.

Isio’s view

Whilst we are broadly in favour of the technical changes to the model, we have concerns over the core value of the new ‘half-life’ parameter and users ‘anchoring’ to this value.

Different users will have different views on how long lasting the impacts of COVID will be and how quickly we might see longevity improvements.

In our view, the core value proposed by the CMI leads to life expectancies that are too high. This is a view we have held for a few years in respect of the core CMI model.

Why it matters

The model will be commonly used in funding valuations for multiple purposes, including cash funding and accounting.

Recent mortality data suggests a small improvement in life expectancies which will come through in higher liabilities. However, adopting a version of the new CMI_2024 model with overly prudent assumptions will lead to overly prudent liabilities.

DWP responded to a Parliamentary Question, confirming that they recognise that the Virgin Media case “could lead to uncertainty and additional costs”. While no final decisions have been made DWP confirmed that they are “actively considering” their next steps and will provide an update in due course.

As the market settles following the recent volatility, uncertainty remains, and reduced consumer confidence is expected to impact future growth. We will continue to monitor markets over the coming months.

The Government has confirmed it intends to respond to the consultation regarding options for DB Schemes in Spring 2025. The proposed flexibility to utilise surpluses could be significant and change how the industry views DB pensions. We will be arranging a number of events once the announcement is made.

Change since 31 December 2024

Commentary over the quarter

Gilt yields have risen by c. 10-15 basis points, with long-term inflation expectations broadly unchanged.

Credit spreads have increased by c. 10 basis points – thus accounting positions are likely to have improved.

Global equity markets were down by c. 4-5%.

Anticipated insurer discount rates are up by 15-20 basis points, exceeding increases in gilt yields. This should improve buyout funding positions for most schemes, other than those with material equity holdings.

Since 31 March 2025 there has been significant market volatility following the introduction of Tariffs, with both equity sell-offs and increases in bond yields. Our article in this quarter’s IQ explores what Sponsors should do in response. If you have any questions regarding the current volatility please reach out to your usual Isio contact.

President Trump puts the IF in Tariffs

Background

“Liberation Day” has brought a rollercoaster ride for the equity and bond markets, with significant falls and jumps on a daily basis depending on the latest newsflow.

Isio’s view

In our view if full-fat tariffs are reimposed with de-globalisation following, markets could fall further still and volatility would be significant. Even with a full reversal in trade policy, we still expect a material slowdown in global growth as business and consumer confidence falters due to the uncertainty.

Our 2025 investment themes remain valid today. Investors still have the chance to take profits on growth assets and prepare dry powder for a better environment to deploy risk – please see link for a summary of our investment themes.

Why it matters

Trustee advisers should be actively monitoring the situation, but considerations for pension scheme sponsors are:

Understand the immediate implications for cash funding e.g. post valuation experience or triggers on contingent funding arrangements.

A scheme’s IAS / FRS basis may behave differently to its primary funding basis, typically having shorter duration (likely small mismatch and slight loss) and higher credit spread exposure (likely large mismatch and small gain).

The new Funding Code increases focus on sponsor covenant for pension scheme funding. For sectors particularly exposed to tariffs this may necessitate alterations to journey plans.

Whilst too early to know the implications, it is likely that insurance pricing and volumes will be impacted. Sponsors with schemes closing in on insurance should be aware of potential roadblocks, especially if cash has been promised to bridge any funding gap.

Keep a close eye on trustee governance arrangements: ensure that there is sufficient LDI collateral, seek speedy and concise communications on any strategy changes.

Investment themes for 2025

Utilising DB surplus

Background

On 28 January the Government confirmed that it will respond to the DB options consultation before the summer. This is expected to include reforms to encourage schemes to run on targeting surplus generation e.g. allowing trustees of all schemes to refund surplus to the employer irrespective of restrictions in scheme rules and potentially lowering the funding threshold for refunding surplus.

Isio’s view

It is a relief that the Pensions Bill will include reforms to make gradual surplus release easier. We are hopeful that the statutory override allowing surplus release will be wide enough to fully remove the current rules lottery and the funding and risk thresholds will be flexible enough to make gradual surplus release relatively common. Professional trustees’ views on the most important reforms to make surplus release more straightforward are shown opposite.

Given the uncertainty in the details and that the reforms may take a couple of years to enact, some employers are working with their trustees to benefit from surplus within existing legislation. In many cases using surplus to offset employer contributions to a DC section is the most viable option – Aberdeen, Aon and Schroders have recently adopted this approach.

Why it matters

Deciding whether to run on over the medium term or insure at the earliest opportunity will likely be the most important decision ever made for your schemes. Once trustees are working towards buy-out they may be reluctant to change course, so we recommend forming a company view and engaging with your trustees as soon as possible.
More insights from our scheme run on survey of professional trustees

New entrants in insurance market

Background

If we look back over the last 20 years, the number of providers in the market has been relatively stable.

Recently three new entrants have joined the insurance market (Royal London, Utmost and Blumont), increasing the level of capacity following the increase in demand in recent years.

Isio’s view

More insurers in the market leads to more competitive tension in transactions, and that can only be a good thing for sponsors, trustees and members of schemes. This has been especially true at the smaller end of the market, where insurer appetite can be limited at times.

Some of the newer entrants, particularly Royal London and Utmost, are quoting in that smaller end of the market. Blumont have also stated their intention to quote on schemes of all sizes, so really positive news. In order to win business, price alone is not always enough. Different schemes will have different priorities, different things they are concerned about or that are important, or even critical to them. The new entrants know this and are tailoring their offers accordingly.

Why it matters

We always advocate that insurers should only be asked to provide a quotation if the sponsor and the trustees would be willing to go ahead and transact with that insurer. With new entrants, a long track-record won’t be available.

We have seen new entrants be flexible on timing, make commitments that other insurers are not typically willing to do, and explore options of transacting with schemes that might have, for example, unusual or complex benefits, in order to get the transaction to go ahead. This gives the new entrants something which potentially makes them stand out from other insurers.

Why has the number of bulk annuity providers increased?

CMI 2024

Background

The annual update of the CMI’s model on future longevity improvements is due out shortly. A consultation on changes to this year’s model closed on 25 March 2025 with the updated model (CMI_2024) expected in Q2 2025.

The key change is a move away from the ‘weights’ parameters used in previous versions which allowed users to only reflect partial or no allowance for individual years impacted by COVID. Instead this will be replaced by an ‘overlay’ which allows the impact of COVID to tail—off over a period controlled by the user – driven by the new ‘half-life’ parameter.

Isio’s view

Whilst we are broadly in favour of the technical changes to the model, we have concerns over the core value of the new ‘half-life’ parameter and users ‘anchoring’ to this value.

Different users will have different views on how long lasting the impacts of COVID will be and how quickly we might see longevity improvements.

In our view, the core value proposed by the CMI leads to life expectancies that are too high. This is a view we have held for a few years in respect of the core CMI model.

Why it matters

The model will be commonly used in funding valuations for multiple purposes, including cash funding and accounting.

Recent mortality data suggests a small improvement in life expectancies which will come through in higher liabilities. However, adopting a version of the new CMI_2024 model with overly prudent assumptions will lead to overly prudent liabilities.

DWP responded to a Parliamentary Question, confirming that they recognise that the Virgin Media case “could lead to uncertainty and additional costs”. While no final decisions have been made DWP confirmed that they are “actively considering” their next steps and will provide an update in due course.

As the market settles following the recent volatility, uncertainty remains, and reduced consumer confidence is expected to impact future growth. We will continue to monitor markets over the coming months.

The Government has confirmed it intends to respond to the consultation regarding options for DB Schemes in Spring 2025. The proposed flexibility to utilise surpluses could be significant and change how the industry views DB pensions. We will be arranging a number of events once the announcement is made.

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The post Isio Quarterly April 2025 appeared first on Isio.

Isio Quarterly January 2025

Daniel Owen — Thu, 23 Jan 2025 15:11:37 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update Recent market volatility TPR’s new Covenant guidance Where next for Clara? Increased payroll costs Investment themes for 2025 Looking forward to next quarter

Change since 30 September 2024

Commentary over the quarter

Gilt yields have risen materially, by c. 55-60 basis points over the quarter while long-term inflation expectations have only risen by c. 5 basis points

Global equity markets were up by c. 6% over the quarter

These movements are likely to have a positive impact on funding levels for those schemes who aren’t fully hedged on their funding measures – as reductions in funding liabilities are likely to exceed corresponding falls in their LDI assets

Credit spreads reduced by c. 10-15 basis points over the quarter – and thus accounting positions may have worsened for most schemes, other than those with lower hedging levels

Anticipated insurer discount rates are up by c. 50 bps over the quarter, slightly lower than the movement in gilt yields. This should result in improvements for most schemes, other than those with higher levels of hedging where the gilt yield movement result in asset losses which exceed any reductions in estimated buyout liabilities

Commentary on accounting movements over the year

Credit spreads reduced slightly over 2024 (c. 5-10 basis points), while global equity markets were up c. 20% over this period, and gilt yields increased significantly (c 100 basis points)

This means that less well hedged (< c. 90%) schemes are expected to see improvements in their net balance sheet positions over the year

In contrast schemes with higher hedging levels may see a worsening in net balance sheet positions due to the lower credit spreads, less (or no) equity exposure and potentially no cash contributions being paid by the sponsor

Recent market volatility

Background

With the Government’s first Budget in late October 2024 and the US election in early November, we saw a lot of market uncertainty in Q4. Traditional growth assets performed well over 2024 while government bond yields have gradually been increasing over the year. In recent weeks gilt yields have exceeded the levels at the peak of the Autumn 2022 LDI crisis and achieving yields not seen since before the 2008 Credit Crunch.

Isio’s view

Given the 2022 LDI crisis, there has been understandable concern at the recent rise in yields. The key difference this time around is the speed of change. During the LDI crisis, yields moved by more than 50 basis points in a single day. In contrast, we’re now seeing changes of 50 basis points over months, rather than days (see graphic).

DB pension schemes now also generally have greater collateral buffers, lower leverage levels and better collateral management strategies in place to cope with yield rises.

Rising yields and the performance of growth assets over 2024 will generally have a positive impact on the funding positions for a typical UK DB Scheme. It will be important to understand the scale of this impact on your Scheme and whether any gains could be locked in.

Why it matters

While we expect pension trustees to be actively managing the situation, we recommend that pension scheme sponsors:

Confirm whether collateral buffers remain sufficient in size and liquidity;

Assess the impact on your schemes’ funding positions;

Consider whether now is the right time to lock in some of these funding gains, e.g. by increasing hedging levels, de-risking assets etc.; and

Consider whether scheme factors are excessively generous, in current market conditions.

Views on TPR’s updated covenant guidance

Background

The Pensions Regulator issued its detailed guidance on assessing covenant in December, to accompany the new Funding Code. There is plenty to digest in over 150 pages of guidance, but the fundamental principle – that employer covenant is the financial ability of entities with a legal obligation to support a pension scheme – remains the same. The primary areas of focus are assessing the cash generation of the employer (as well as any contingent assets) and understanding the employer’s future outlook or its ‘Prospects’.

Isio’s view

The guidance provides more detail on how to assess the new subjective covenant metrics of:

Covenant Longevity period – how long the employer will be able to support the scheme;

Covenant Reliability period – the period over which the trustee has reasonable certainty over cash generated by the employer;

Reasonable affordability – the contributions the employer can reasonably afford;

Maximum Affordable Contributions – the cash that might be available to be paid to the scheme to remedy any deficit from a downside scheme stress event.

The consequences of a cautious assessment by the trustees will be a shorter period for generation of scheme asset returns, and therefore increased cash required from the employer. TPR’s previous guidance wanted trustees to behave like bankers, but treating trustees like investors and articulating the value story and outlook for the employer will now result in a better outcome for sponsors.

Why it matters

If employers are passive in the covenant assessment, it is likely to result in Trustees wanting more cash than necessary.

Employers taking the initiative with trustees and providing information which easily translates into these new covenant concepts will help achieve the best outcomes.

For more detail on the new covenant guidance, please read our summary below.
Read more about TPR’s New Covenant Guidance

The latest Clara deal, and what more may be to come

Background

Clara-Pensions announced their third deal at the end of 2024 – taking on the benefits of the c.1,500 members of the Wates Pension Fund. The Wates transaction is valued at c.£210m – with an additional £19m provided by the sponsor and further capital security provided by Clara. The Wates members join the existing 20,000 members within Clara and £1.2bn of assets under management.

Isio’s view

This is a milestone deal for Clara – their first with an active sponsor – and proof of concept that member outcomes can be improved by a superfund transaction despite giving up an ongoing sponsor covenant. The fact they can deal with illiquid assets in-specie could also open the risk-settlement door to a wider range of schemes.

More deals are in the pipeline, and we understand that Clara are continuing to look towards innovation in this space including: options for the strongest sponsors to participate via contingent guarantees; options for co-investment for sponsors who wish to share in investment upsides; and options for PPF rescue at less than 100% of benefits (but more than PPF benefits). Clearly more “vanilla” deals are essential to continue to establish the model but it would be great to see more innovation in this area.

Why it matters

For sponsors this is another pathway to de-risking your balance sheet and mitigating future cash calls from mostly legacy defined benefit arrangements. For schemes that are really well funded insurance or run-on solutions may still be the only game in town. However, for those that are a bit further away, the opportunity to settle your liabilities is now closer than ever.

Increases in National Insurance and the National Minimum/Living Wage

Background

The recent increase to employer National Insurance (NI) was widely billed in advance of the Autumn Budget, yet the scale of the changes came as a surprise – in particular the lowering of the Secondary Threshold, which will likely have a bigger impact on the amount of NI paid by businesses than the increase in the headline rate.

Another change was the increase in the National Minimum/Living Wage. For individuals aged 21 and over this will increase by almost 7%, whereas for individuals aged 18 – 20 there will be an even larger increase of 16%.

Isio’s view

Rebalancing reward away from pay and into other benefits that do not attract employer NI can help to manage costs.

Directing more reward into pensions is one obvious way of doing this, through core pension contributions, as well as bonus sacrifice and/or a shared cost Additional Voluntary Contribution (AVC).

Equally, those businesses already using existing salary sacrifice arrangements (and sharing some of the NI savings in the form of employee contributions), will need to consider whether these need to be revisited in light of the higher savings.

Also worth considering are approved non-financial salary sacrifice arrangements such as electric vehicles, cycle to work and technology schemes.

Why it matters

The increase in employer’s NI rate alongside the reduction in the threshold coupled with the increases in minimum wage could mean employers are likely to be facing a very significant increase in their employment costs. The cost of employing an individual earning National Minimum Wage, for example, could increase by over 10% of payroll.

For more commentary on the Budget changes, see our Insights page here.
What the Budget and Employment Rights Bill mean for payroll

What to watch out for in 2025

Background

Investment returns over 2024 resulted in another great year for DB pension scheme funding levels, both for the corporate sector and, in particular, the public sector, many of which have accelerated their journey plans.

2025 brings a new economic and political landscape with equity markets at all-time highs but heavily concentrated, credit spreads being historically tight and long-term gilt yields at levels not seen for almost 20 years.

Isio’s view

We believe now is the time to reassess investment strategy and asset allocation. Our themes for 2025 are:

Reallocating profits from expensive growth assets into fresh opportunities;

Keeping dry powder waiting for a better environment to deploy risk;

Tackling structural challenges facing pension scheme investors

Why it matters
Looking forward there are challenges facing risk assets that are priced for perfection based on their high Price / Earnings ratios and tight credit spreads. With many DB schemes ahead of journey plan, now is time to reassess the asset allocation to ensure the balance is right.
Read the full commentary

The PPF initially consulted in the autumn on maintaining the levy at £100m for 2025/26, but has confirmed it will delay publishing the outcome until the end of January to engage with the Department of Work and Pensions – providing optimism that legislative change to facilitate nil levies may be forthcoming.

A consultation on the next version of the CMI longevity projection model is due to be issued in February 2025, with the model itself released in Q2. This update may represent a significant overhaul of the model compared to previous versions.

Isio has released a comprehensive analysis on the state of the Gender Pay Gap in the UK. Pay gap reporting obligations are expanding and the report also provides insights on how employers can prepare for the forthcoming changes. Download your copy here.

As employers work through 31 December financial statements, auditors are increasingly pressing for investigations into Virgin Media issues. We’ve been exploring this topic with the Big 4 auditors, and will be releasing an Insights article soon. If you want to be notified when this is released, please subscribe below.

Subscribe to IQ

Change since 30 September 2024

Commentary over the quarter

Gilt yields have risen materially, by c. 55-60 basis points over the quarter while long-term inflation expectations have only risen by c. 5 basis points

Global equity markets were up by c. 6% over the quarter

These movements are likely to have a positive impact on funding levels for those schemes who aren’t fully hedged on their funding measures – as reductions in funding liabilities are likely to exceed corresponding falls in their LDI assets

Credit spreads reduced by c. 10-15 basis points over the quarter – and thus accounting positions may have worsened for most schemes, other than those with lower hedging levels

Anticipated insurer discount rates are up by c. 50 bps over the quarter, slightly lower than the movement in gilt yields. This should result in improvements for most schemes, other than those with higher levels of hedging where the gilt yield movement result in asset losses which exceed any reductions in estimated buyout liabilities

Commentary on accounting movements over the year

Credit spreads reduced slightly over 2024 (c. 5-10 basis points), while global equity markets were up c. 20% over this period, and gilt yields increased significantly (c 100 basis points)

This means that less well hedged (< c. 90%) schemes are expected to see improvements in their net balance sheet positions over the year

In contrast schemes with higher hedging levels may see a worsening in net balance sheet positions due to the lower credit spreads, less (or no) equity exposure and potentially no cash contributions being paid by the sponsor

Recent market volatility

Background

With the Government’s first Budget in late October 2024 and the US election in early November, we saw a lot of market uncertainty in Q4. Traditional growth assets performed well over 2024 while government bond yields have gradually been increasing over the year. In recent weeks gilt yields have exceeded the levels at the peak of the Autumn 2022 LDI crisis and achieving yields not seen since before the 2008 Credit Crunch.

Isio’s view

Given the 2022 LDI crisis, there has been understandable concern at the recent rise in yields. The key difference this time around is the speed of change. During the LDI crisis, yields moved by more than 50 basis points in a single day. In contrast, we’re now seeing changes of 50 basis points over months, rather than days (see graphic).

DB pension schemes now also generally have greater collateral buffers, lower leverage levels and better collateral management strategies in place to cope with yield rises.

Rising yields and the performance of growth assets over 2024 will generally have a positive impact on the funding positions for a typical UK DB Scheme. It will be important to understand the scale of this impact on your Scheme and whether any gains could be locked in.

Why it matters

While we expect pension trustees to be actively managing the situation, we recommend that pension scheme sponsors:

Confirm whether collateral buffers remain sufficient in size and liquidity;

Assess the impact on your schemes’ funding positions;

Consider whether now is the right time to lock in some of these funding gains, e.g. by increasing hedging levels, de-risking assets etc.; and

Consider whether scheme factors are excessively generous, in current market conditions.

Views on TPR’s updated covenant guidance

Background

The Pensions Regulator issued its detailed guidance on assessing covenant in December, to accompany the new Funding Code. There is plenty to digest in over 150 pages of guidance, but the fundamental principle – that employer covenant is the financial ability of entities with a legal obligation to support a pension scheme – remains the same. The primary areas of focus are assessing the cash generation of the employer (as well as any contingent assets) and understanding the employer’s future outlook or its ‘Prospects’.

Isio’s view

The guidance provides more detail on how to assess the new subjective covenant metrics of:

Covenant Longevity period – how long the employer will be able to support the scheme;

Covenant Reliability period – the period over which the trustee has reasonable certainty over cash generated by the employer;

Reasonable affordability – the contributions the employer can reasonably afford;

Maximum Affordable Contributions – the cash that might be available to be paid to the scheme to remedy any deficit from a downside scheme stress event.

The consequences of a cautious assessment by the trustees will be a shorter period for generation of scheme asset returns, and therefore increased cash required from the employer. TPR’s previous guidance wanted trustees to behave like bankers, but treating trustees like investors and articulating the value story and outlook for the employer will now result in a better outcome for sponsors.

Why it matters

If employers are passive in the covenant assessment, it is likely to result in Trustees wanting more cash than necessary.

Employers taking the initiative with trustees and providing information which easily translates into these new covenant concepts will help achieve the best outcomes.

For more detail on the new covenant guidance, please read our summary below.
Read more about TPR’s New Covenant Guidance

The latest Clara deal, and what more may be to come

Background

Clara-Pensions announced their third deal at the end of 2024 – taking on the benefits of the c.1,500 members of the Wates Pension Fund. The Wates transaction is valued at c.£210m – with an additional £19m provided by the sponsor and further capital security provided by Clara. The Wates members join the existing 20,000 members within Clara and £1.2bn of assets under management.

Isio’s view

This is a milestone deal for Clara – their first with an active sponsor – and proof of concept that member outcomes can be improved by a superfund transaction despite giving up an ongoing sponsor covenant. The fact they can deal with illiquid assets in-specie could also open the risk-settlement door to a wider range of schemes.

More deals are in the pipeline, and we understand that Clara are continuing to look towards innovation in this space including: options for the strongest sponsors to participate via contingent guarantees; options for co-investment for sponsors who wish to share in investment upsides; and options for PPF rescue at less than 100% of benefits (but more than PPF benefits). Clearly more “vanilla” deals are essential to continue to establish the model but it would be great to see more innovation in this area.

Why it matters

For sponsors this is another pathway to de-risking your balance sheet and mitigating future cash calls from mostly legacy defined benefit arrangements. For schemes that are really well funded insurance or run-on solutions may still be the only game in town. However, for those that are a bit further away, the opportunity to settle your liabilities is now closer than ever.

Increases in National Insurance and the National Minimum/Living Wage

Background

The recent increase to employer National Insurance (NI) was widely billed in advance of the Autumn Budget, yet the scale of the changes came as a surprise – in particular the lowering of the Secondary Threshold, which will likely have a bigger impact on the amount of NI paid by businesses than the increase in the headline rate.

Another change was the increase in the National Minimum/Living Wage. For individuals aged 21 and over this will increase by almost 7%, whereas for individuals aged 18 – 20 there will be an even larger increase of 16%.

Isio’s view

Rebalancing reward away from pay and into other benefits that do not attract employer NI can help to manage costs.

Directing more reward into pensions is one obvious way of doing this, through core pension contributions, as well as bonus sacrifice and/or a shared cost Additional Voluntary Contribution (AVC).

Equally, those businesses already using existing salary sacrifice arrangements (and sharing some of the NI savings in the form of employee contributions), will need to consider whether these need to be revisited in light of the higher savings.

Also worth considering are approved non-financial salary sacrifice arrangements such as electric vehicles, cycle to work and technology schemes.

Why it matters

The increase in employer’s NI rate alongside the reduction in the threshold coupled with the increases in minimum wage could mean employers are likely to be facing a very significant increase in their employment costs. The cost of employing an individual earning National Minimum Wage, for example, could increase by over 10% of payroll.

For more commentary on the Budget changes, see our Insights page here.
What the Budget and Employment Rights Bill mean for payroll

What to watch out for in 2025

Background

Investment returns over 2024 resulted in another great year for DB pension scheme funding levels, both for the corporate sector and, in particular, the public sector, many of which have accelerated their journey plans.

2025 brings a new economic and political landscape with equity markets at all-time highs but heavily concentrated, credit spreads being historically tight and long-term gilt yields at levels not seen for almost 20 years.

Isio’s view

We believe now is the time to reassess investment strategy and asset allocation. Our themes for 2025 are:

Reallocating profits from expensive growth assets into fresh opportunities;

Keeping dry powder waiting for a better environment to deploy risk;

Tackling structural challenges facing pension scheme investors

Why it matters
Looking forward there are challenges facing risk assets that are priced for perfection based on their high Price / Earnings ratios and tight credit spreads. With many DB schemes ahead of journey plan, now is time to reassess the asset allocation to ensure the balance is right.
Read the full commentary

The PPF initially consulted in the autumn on maintaining the levy at £100m for 2025/26, but has confirmed it will delay publishing the outcome until the end of January to engage with the Department of Work and Pensions – providing optimism that legislative change to facilitate nil levies may be forthcoming.

A consultation on the next version of the CMI longevity projection model is due to be issued in February 2025, with the model itself released in Q2. This update may represent a significant overhaul of the model compared to previous versions.

Isio has released a comprehensive analysis on the state of the Gender Pay Gap in the UK. Pay gap reporting obligations are expanding and the report also provides insights on how employers can prepare for the forthcoming changes. Download your copy here.

As employers work through 31 December financial statements, auditors are increasingly pressing for investigations into Virgin Media issues. We’ve been exploring this topic with the Big 4 auditors, and will be releasing an Insights article soon. If you want to be notified when this is released, please subscribe below.

Subscribe to IQ

Join our mailing list

Get the next issue of Isio Quarterly delivered straight to your inbox

Subscribe now

The post Isio Quarterly January 2025 appeared first on Isio.

Isio Quarterly October 2024

Daniel Owen — Thu, 17 Oct 2024 14:17:03 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update New Funding Code Virgin Media Run-on survey of professional trustees Out-of-model investment risks Automatic Enrolment in the Republic of Ireland Looking forward to next quarter

Change since 30 June 2024

Commentary

It’s been a quiet quarter, and we don’t expect scheme’s funding positions to have changed materially either way in most cases.

Gilt yields fell by c. 10-15 basis points over the quarter, with slightly lower falls of 5 – 10 basis points in long-term inflation expectations. As both these movements have been in the same direction they will largely offset each other for funding valuations.

Equity markets were up slightly, with UK equity markets returning c1% over the risk-free rate.

Credit spreads increased slightly (less than 5 basis points) over the quarter – and thus accounting positions may have improved slightly for most schemes.

Download a full report

New DB funding regime in force

Background

After many years of waiting, the new funding code has finally come into force and will apply to valuations with an effective date on or after 22 September 2024. The new code builds on the existing DB funding regime by requiring trustees and sponsors:

to have a long-term plan to be at least fully funded on a basis that reflects a low-dependency investment strategy by the time their scheme is significantly mature; and

to make sure their technical provisions reflect the journey plan to get there.

All of this will need to be documented in a new Statement of Strategy.

Isio’s view

With generally improved funding levels across UK DB schemes, the financial impact of the new funding regime may be less than first thought. The first valuations under the new funding code will however still require significant additional work in collaboration with the trustees.  Those schemes with late 2024 and early 2025 valuation dates will end up acting as guinea pigs for the rest of the industry as it gets to grips with how the new requirements are applied in practice for the first time.

Why it matters

Sponsors should not rely solely on their trustees to understand and reflect the new funding regime at the next valuation. Sponsors should be:

Thinking about what long-term objective to target, and the implications on the technical provisions.

Confirming expected time to “significant maturity”, to understand how long you have before the long-term objective should be reached.

Start thinking about employer covenant (now a legally defined term under the new regime) with future assessments to focus on company cashflows and “prospects”

Consider whether to target the prescriptive “Fast Track” approach to minimise scrutiny from the Pensions Regulator, or the more flexible “Bespoke” approach.

Read more

Virgin Media case

Background

In June 2023 the High Court judged that historic amendments made to the Virgin Media scheme between 1997 and 2016 were invalid unless Section 37 actuarial certification was obtained (and could be evidenced) – a ruling which was upheld by the Court of Appeal in July 2024.

This case has wider applicability to DB pension schemes which were contracted out between 1997 to 2016 – who could also find that historic amendments are invalid if they don’t have the appropriate documentation.

Isio’s view

This potentially causes a huge headache for sponsors and trustees alike. The nightmare scenario would be having to unwind historic amendments simply due to gaps in records, rather than because these changes didn’t meet the requirements for certification at the time.

Given the potential impact based on a technicality, various industry bodies are actively lobbying DWP to intervene on this issue and retrospectively validate historic amendments which met all the right conditions for actuarial certification at the time, but where evidence of this cannot be found. However, it remains unclear whether DWP will step in.

Why it matters

For DB schemes going through an insurance or M&A process, there is a more pressing need to understand any potential risks to the underlying obligations.

More broadly, auditors are already expecting further investigation into this issue to have commenced, ahead of their next reporting periods – doing nothing is not an option.

Finally, sponsors should try to understand any potential changes in benefit obligations – particularly if significant – as these could have funding implications as well as influence strategic pensions decisions.

We will be running a webinar in the coming months, on the implications of the Virgin Media ruling. If you’d like to receive an invite, please join our mailing list.

Join our mailing list

Scheme run on survey of professional trustees

Background

With UK DB schemes better funded than they have been for decades, employers and trustees are considering whether to take the opportunity to move to insurance at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we surveyed 83 professional trustees responsible for over £350bn of DB assets to get their views on whether to run on and, for those schemes that do, how to implement this.

Isio’s view

Over two-thirds of professional trustees believe that the minimum member share of surplus to justify running on is 40% or less. This reflects the views expressed at our recent event for large sponsors that upside should be weighted towards employers who are responsible for funding 100% of any deficits that emerge.

Employers looking to run their schemes on can be encouraged that trustees are keen to work collaboratively with them. Their biggest concern is likely to be protection on insolvency which can be improved if necessary through contingent arrangements like escrows or parent guarantees.

Why it matters

Deciding whether to insure at the earliest opportunity, to run on over the longer term, or something in-between, will be the most financially important decision that most trustees and employers ever agree for their schemes.

The views of the sponsor are crucial – indeed the employers view scored as the most important factor for professional trustees in deciding whether to run on beyond full buy-out funding. However, trustees typically hold much of the power in agreeing the “endgame”, so sponsors need to understand trustee perspectives going into these discussions.

View the survey

Managing tail risks

Background

Many pension schemes are now well funded and running low risk strategies, and modelled risks metrics like ‘Value-at-Risk’ give the impression that not a lot can go wrong. However, we know from experience that “out of model” risks can and do happen. Over summer, for example, there was significant volatility in Japanese equities – an event which had only a 0.00000000000000000000003% probability of occurrence, and was in the top 5 market movements of all time. Whilst most schemes have limited exposure to this market, it does highlight the potential remaining risk.

Isio’s view

Sponsors and trustees should consider the exposure of their schemes to out of model risks. This review should identify the “pinch points” and understand their impact if the unexpected occurs. Examples of such pinch points include defaults, liquidity, deflation, longevity and IT outages. Where pinch points are identified a plan can be formulated – either to remove the exposure or to improve governance in case the event happens.

Why it matters

If a scheme with 1% asset outperformance over its liabilities has a 10% hit to funding, it would take over 10 years to recover without re-risking or additional cash contributions. Understanding these types of risks means that sponsors and trustees can be proactive if they occur, giving them the greatest chance of mitigating the impact. The LDI crisis in 2022 was a great example of this, where those with clear pre-agreed frameworks generally fared better.

Please get in touch with Barry.Jones@isio.com to discuss how we could help you to identify and manage remaining risks in your pension scheme
Get in touch

Irish Auto-Enrolment launch delayed again!

Background

Ireland is the only OECD country without an Auto-Enrolment (or similar) solution in place. The Government has been considering a solution for decades, and a 1 January 2025 introduction had been quoted. However, much remains to be done including a search for asset managers to provide the default investment strategies, comprehensive public education, and consultation with payroll departments on who the administrative burden will mostly fall. Auto-Enrolment is therefore now expected to come into effect on September 30th 2025.

Isio’s view

Auto-Enrolment is overwhelmingly welcomed, particularly given the success in the UK and globally. The 6% matching contributions in 10 years’ time (with a 33% government uplift) will bring contributions well above the UK’s current Auto-Enrolment minimums and more in line with what we believe is a reasonable level of contributions to support retirement. The delays are understandable, but more clarity should be provided on the remaining design areas so that employers can plan effectively.

Why it matters
Auto-enrolment is delayed, but it is coming! It will have a cost and administrative impact on all employers and employees in Ireland. Employers should consider their Irish pensions strategy now and make sure the pensions in place are compliant before Auto-Enrolment arrives. This will help to protect employees from potentially worse off benefit solutions, attract and retain the best staff, and get ahead of a potentially clunky and burdensome Auto-Enrolment launch. As evidenced globally, this will have a huge impact on savers, and will completely change a developing benefits market.

Please get in touch with Edward.Andrew@isio.com to discuss what we are seeing in the market, the options that employers have available to them and the potential impacts and how best to prepare.
Get in touch

The Government announces its Autumn Budget on 30th October, amid speculation that pensions tax could be an area the Chancellor targets. If you’d like to hear more on this topic, sign up for our webinar on Budget day, where we’ll be sharing our reactions to the Budget

We’re hosting our “Accounting for Pensions” webinar in the coming months, covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list

On Tuesday 19th November at 10.30am – 12:15pm, we will be hosting Isio’s annual Fiduciary Management Conference live from a London studio. Our expert speakers will be exploring how fiduciary managers have been rebuilding their propositions for this new era and will shine a light on the trends in the fiduciary landscape highlighting areas to be cautious of when using a delegated model. You can register for the conference here.

Subscribe to IQ

Change since 30 June 2024

Commentary

It’s been a quiet quarter, and we don’t expect scheme’s funding positions to have changed materially either way in most cases.

Gilt yields fell by c. 10-15 basis points over the quarter, with slightly lower falls of 5 – 10 basis points in long-term inflation expectations. As both these movements have been in the same direction they will largely offset each other for funding valuations.

Equity markets were up slightly, with UK equity markets returning c1% over the risk-free rate.

Credit spreads increased slightly (less than 5 basis points) over the quarter – and thus accounting positions may have improved slightly for most schemes.

Download a full report

New DB funding regime in force

Background

After many years of waiting, the new funding code has finally come into force and will apply to valuations with an effective date on or after 22 September 2024. The new code builds on the existing DB funding regime by requiring trustees and sponsors:

to have a long-term plan to be at least fully funded on a basis that reflects a low-dependency investment strategy by the time their scheme is significantly mature; and

to make sure their technical provisions reflect the journey plan to get there.

All of this will need to be documented in a new Statement of Strategy.

Isio’s view

With generally improved funding levels across UK DB schemes, the financial impact of the new funding regime may be less than first thought. The first valuations under the new funding code will however still require significant additional work in collaboration with the trustees.  Those schemes with late 2024 and early 2025 valuation dates will end up acting as guinea pigs for the rest of the industry as it gets to grips with how the new requirements are applied in practice for the first time.

Why it matters

Sponsors should not rely solely on their trustees to understand and reflect the new funding regime at the next valuation. Sponsors should be:

Thinking about what long-term objective to target, and the implications on the technical provisions.

Confirming expected time to “significant maturity”, to understand how long you have before the long-term objective should be reached.

Start thinking about employer covenant (now a legally defined term under the new regime) with future assessments to focus on company cashflows and “prospects”

Consider whether to target the prescriptive “Fast Track” approach to minimise scrutiny from the Pensions Regulator, or the more flexible “Bespoke” approach.

Read more

Virgin Media case

Background

In June 2023 the High Court judged that historic amendments made to the Virgin Media scheme between 1997 and 2016 were invalid unless Section 37 actuarial certification was obtained (and could be evidenced) – a ruling which was upheld by the Court of Appeal in July 2024.

This case has wider applicability to DB pension schemes which were contracted out between 1997 to 2016 – who could also find that historic amendments are invalid if they don’t have the appropriate documentation.

Isio’s view

This potentially causes a huge headache for sponsors and trustees alike. The nightmare scenario would be having to unwind historic amendments simply due to gaps in records, rather than because these changes didn’t meet the requirements for certification at the time.

Given the potential impact based on a technicality, various industry bodies are actively lobbying DWP to intervene on this issue and retrospectively validate historic amendments which met all the right conditions for actuarial certification at the time, but where evidence of this cannot be found. However, it remains unclear whether DWP will step in.

Why it matters

For DB schemes going through an insurance or M&A process, there is a more pressing need to understand any potential risks to the underlying obligations.

More broadly, auditors are already expecting further investigation into this issue to have commenced, ahead of their next reporting periods – doing nothing is not an option.

Finally, sponsors should try to understand any potential changes in benefit obligations – particularly if significant – as these could have funding implications as well as influence strategic pensions decisions.

We will be running a webinar in the coming months, on the implications of the Virgin Media ruling. If you’d like to receive an invite, please join our mailing list.

Join our mailing list

Scheme run on survey of professional trustees

Background

With UK DB schemes better funded than they have been for decades, employers and trustees are considering whether to take the opportunity to move to insurance at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we surveyed 83 professional trustees responsible for over £350bn of DB assets to get their views on whether to run on and, for those schemes that do, how to implement this.

Isio’s view

Over two-thirds of professional trustees believe that the minimum member share of surplus to justify running on is 40% or less. This reflects the views expressed at our recent event for large sponsors that upside should be weighted towards employers who are responsible for funding 100% of any deficits that emerge.

Employers looking to run their schemes on can be encouraged that trustees are keen to work collaboratively with them. Their biggest concern is likely to be protection on insolvency which can be improved if necessary through contingent arrangements like escrows or parent guarantees.

Why it matters

Deciding whether to insure at the earliest opportunity, to run on over the longer term, or something in-between, will be the most financially important decision that most trustees and employers ever agree for their schemes.

The views of the sponsor are crucial – indeed the employers view scored as the most important factor for professional trustees in deciding whether to run on beyond full buy-out funding. However, trustees typically hold much of the power in agreeing the “endgame”, so sponsors need to understand trustee perspectives going into these discussions.

View the survey

Managing tail risks

Background

Many pension schemes are now well funded and running low risk strategies, and modelled risks metrics like ‘Value-at-Risk’ give the impression that not a lot can go wrong. However, we know from experience that “out of model” risks can and do happen. Over summer, for example, there was significant volatility in Japanese equities – an event which had only a 0.00000000000000000000003% probability of occurrence, and was in the top 5 market movements of all time. Whilst most schemes have limited exposure to this market, it does highlight the potential remaining risk.

Isio’s view

Sponsors and trustees should consider the exposure of their schemes to out of model risks. This review should identify the “pinch points” and understand their impact if the unexpected occurs. Examples of such pinch points include defaults, liquidity, deflation, longevity and IT outages. Where pinch points are identified a plan can be formulated – either to remove the exposure or to improve governance in case the event happens.

Why it matters

If a scheme with 1% asset outperformance over its liabilities has a 10% hit to funding, it would take over 10 years to recover without re-risking or additional cash contributions. Understanding these types of risks means that sponsors and trustees can be proactive if they occur, giving them the greatest chance of mitigating the impact. The LDI crisis in 2022 was a great example of this, where those with clear pre-agreed frameworks generally fared better.

Please get in touch with Barry.Jones@isio.com to discuss how we could help you to identify and manage remaining risks in your pension scheme
Get in touch

Irish Auto-Enrolment launch delayed again!

Background

Ireland is the only OECD country without an Auto-Enrolment (or similar) solution in place. The Government has been considering a solution for decades, and a 1 January 2025 introduction had been quoted. However, much remains to be done including a search for asset managers to provide the default investment strategies, comprehensive public education, and consultation with payroll departments on who the administrative burden will mostly fall. Auto-Enrolment is therefore now expected to come into effect on September 30th 2025.

Isio’s view

Auto-Enrolment is overwhelmingly welcomed, particularly given the success in the UK and globally. The 6% matching contributions in 10 years’ time (with a 33% government uplift) will bring contributions well above the UK’s current Auto-Enrolment minimums and more in line with what we believe is a reasonable level of contributions to support retirement. The delays are understandable, but more clarity should be provided on the remaining design areas so that employers can plan effectively.

Why it matters
Auto-enrolment is delayed, but it is coming! It will have a cost and administrative impact on all employers and employees in Ireland. Employers should consider their Irish pensions strategy now and make sure the pensions in place are compliant before Auto-Enrolment arrives. This will help to protect employees from potentially worse off benefit solutions, attract and retain the best staff, and get ahead of a potentially clunky and burdensome Auto-Enrolment launch. As evidenced globally, this will have a huge impact on savers, and will completely change a developing benefits market.

Please get in touch with Edward.Andrew@isio.com to discuss what we are seeing in the market, the options that employers have available to them and the potential impacts and how best to prepare.
Get in touch

The Government announces its Autumn Budget on 30th October, amid speculation that pensions tax could be an area the Chancellor targets. If you’d like to hear more on this topic, sign up for our webinar on Budget day, where we’ll be sharing our reactions to the Budget

We’re hosting our “Accounting for Pensions” webinar in the coming months, covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list

On Tuesday 19th November at 10.30am – 12:15pm, we will be hosting Isio’s annual Fiduciary Management Conference live from a London studio. Our expert speakers will be exploring how fiduciary managers have been rebuilding their propositions for this new era and will shine a light on the trends in the fiduciary landscape highlighting areas to be cautious of when using a delegated model. You can register for the conference here.

Subscribe to IQ

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The post Isio Quarterly October 2024 appeared first on Isio.

Isio Quarterly July 2024

Daniel Owen — Tue, 16 Jul 2024 07:40:51 +0000

Welcome to IQ

Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update General Election results Investment grade credit spreads at historic lows Isio’s Independent Trustee Survey 2024 Incorporating illiquids into DC funds PRO event for large scheme sponsors Looking forward to next quarter

Change since 31 March 2024

Commentary

Corporate bond and gilt yields increased by c. 0.25-0.3% and long-term inflation fell by 2-3 basis points over the quarter

Credit spreads increased slightly (less than 5 basis points) over the quarter

Equity markets saw a positive quarter (returning c.+3%)

These movements are likely to have improved buyout positions due to reductions in liabilities exceeding reductions in assets

Accounting and funding positions are also expected to have improved in general, other than for well-hedged schemes with low proportions of return seeking assets

Download a deep-dive report

New Labour government and what it could mean for pensions

Background
With Labour securing a sizeable majority their promised pensions review has the potential to be more radical and grasp some of the thornier pensions issues. Their manifesto noted this would look to improve member outcomes, ensure schemes take advantage of consolidation, and to increase productive investment in UK markets. Although they dropped plans to reintroduce the Lifetime Allowance, pensions might be seen as a convenient target for ‘stealth’ taxes when fiscal circumstances are tight.

Emma Reynolds has been confirmed as the new pensions minister. Interestingly, she has been appointed to both the Department of Work and Pensions and the Treasury. This may be a deliberate attempt to provide a more joined up approach to policy and dealing with two separate regulatory bodies (The Pensions Regulator and the Financial Conduct Authority).

Isio’s view

We hope the scope and timescale of a pensions review will be clarified quickly. Equally, it will be important to understand what existing pensions policy developments a new Pensions Minister will accelerate, put on the back-burner or bin altogether. Whilst ongoing initiatives such as CDCs and dashboards are likely to continue as planned there are some areas of uncertainty such as extension of auto-enrolment, DB surplus extraction and the PPF as a public sector consolidator. Proposed changes to employment laws will also see extended pay gap reporting requirements and greater policing through a Single Enforcement Body.

Why it matters

Whilst the change in government is unlikely to lead to an immediate change in direction of pensions policies, there could be a re-prioritisation which employers will have to adapt to. We hope to see longstanding policy initiatives finalised quickly, e.g. the new funding code, and areas of uncertainty addressed promptly, e.g. DB surplus extraction. For any changes to employment laws, we hope time will be given for proper industry consultation.
More on the government’s plans for pensions

Investment grade credit spreads at historic lows – time to review?

Background
Investment grade corporate bond spreads have narrowed significantly since the gilt market crisis that occurred following 2022’s mini-budget. With credit spreads now at historic lows, there is little room for them to tighten further, limiting the additional return an investor might expect to receive over equivalent government bonds and providing limited protection against defaults.

Isio’s view

We see the downside risk of holding investment grade corporate bonds being greater than the upside. With spreads more likely to widen than to narrow further resulting in prices to fall relative to government bonds, we see an exposure for pension schemes’ funding positions to deteriorate. We believe there is merit in clients reviewing and reducing their exposure to investment grade credit, or pausing any planned increases.

Why it matters

Investment grade corporate bonds have generally been seen as a key building block of de-risked investment portfolios, primarily due to the asset being perceived as low risk and providing a stable income and linkage to how insurers price insurance transactions. However, from our discussions with insurers we believe the link between corporate bond spreads and insurance pricing currently to be weak, meaning buying investment grade credit prior to insurance may not be an optimal strategy. Sponsors should challenge these preconceptions at current spreads and consider other assets which could provide a better risk-return outlook.

Uncovering the most influential Professional Trustees

Background

With the growing burden of pensions regulation, trustee boards are under pressure to have the right skillsets to run their schemes effectively. Sponsors and trustees are increasingly turning to commercial trustee firms for support. Isio’s annual Independent Trustee survey uncovers the most influential firms and is a must-read for those selecting a professional trustee.

Isio’s view

The professional independent trustee market is thriving and among the most notable trends is the rise of sole trusteeship, including the increasing use of this model by larger schemes. There is also a growing differentiation in firms which ranges from firms that are focused exclusively on trusteeship to those that offer bundled models including a range of governance and support services.

Why it matters

Having skilled and experienced trustees in place can enable faster decision-making and can often ease the burden on the sponsor’s management time. In addition, the Regulator is placing increased focus on the diversity of trustee boards which is further driving the growth in independent trustee appointments. Sponsors should consider whether their existing trustees have the right skills, capabilities and diversity to help deliver their future pensions strategy.

Read the report

What are DC providers planning?

Background

Following the launch of the Mansion House Compact in 2023, there have been increased murmurings from DC providers regarding their plans to incorporate illiquid assets into their default investment strategies. However, the degree of transparency in these plans vary, with few clearly setting out their plans beyond stating “it’s in the pipeline”. Our DC Investment team have spoken to 12 major commercial Master Trusts on their plans for incorporating illiquid assets into their defaults.

Isio’s view

We would like to see meaningful allocations to illiquid assets within DC defaults in the future with a clear plan from providers. We believe allocations should reflect diversification across managers and asset types within the ‘illiquid’ banner. We also hope providers view this as an opportunity to incorporate sustainable themes more boldly within defaults.

Why it matters

Adopting illiquids assets within DC defaults should help improve outcomes for members in retirement, but how providers implement this, and when, will be important. This is a new opportunity for DC providers and we expect to see significant innovation across the market over the coming months. Our series of papers on this over the next year aims to provide transparency in providers plans and adoption of this asset class.
See our DC market update

The majority of providers are moving towards a ‘two default’ route, with premium and low cost default options, although all providers are planning on including illiquids assets in at least one.
Find out more about illiquids

Purposeful Run On – senior executives at large scheme sponsors give their view

Background
With UK DB schemes better funded than they have been for decades, employers are considering whether to take the opportunity to remove DB schemes from their balance sheets at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we hosted a roundtable event for senior executives sponsoring large UK DB schemes.

Isio’s view

The main themes emerging from the discussion are shown in our report opposite. In our view, there are several changes that could help turn DB schemes from a “problem” into an “opportunity” e.g. the legislative changes consulted on by the previous Government and better guidance from the Pensions Regulator that reflects the reality of surplus. However, for many schemes surplus can already be released gradually under existing legislation, and sponsors should find out whether this applies for their schemes.
See how we are outpacing change

Why it matters
Deciding whether to insure at the earliest opportunity or adopt a Purposeful Run On for the medium to long-term (or something in-between) will be the most financially important decision that most trustees and employers ever agree for their schemes. The views of the sponsor are crucial, but trustees typically hold much of the power in “endgame” discussions. It can be easier to agree the sponsors preferred approach if it is raised early, so it is important for sponsors to quantitatively assess different options.
View report

The appeal for the Virgin Media Ltd v NTL case, which could have implications for schemes that haven’t found relevant S37 certificates, was heard by the Court of Appeal on the 25th June. However, it’s also not clear whether the appeal ruling will clarify the position for all schemes going forward. We anticipate the judgement will be published early Autumn but this has not been made clear yet.

Isio will be hosting its first ever Investment Conference in London this October. We would love for you to join us for an insightful afternoon where we will delve into new innovative investment strategies, societal impacts, and tomorrow’s key asset classes – against the backdrop of the new Labour government in the UK and impending elections in the US. You can register here.

We’ll also be hosting an accounting webinar in Autumn covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list.

Subscribe to IQ

Change since 31 March 2024

Commentary

Corporate bond and gilt yields increased by c. 0.25-0.3% and long-term inflation fell by 2-3 basis points over the quarter

Credit spreads increased slightly (less than 5 basis points) over the quarter

Equity markets saw a positive quarter (returning c.+3%)

These movements are likely to have improved buyout positions due to reductions in liabilities exceeding reductions in assets

Accounting and funding positions are also expected to have improved in general, other than for well-hedged schemes with low proportions of return seeking assets

Download a deep-dive report

New Labour government and what it could mean for pensions

Background
With Labour securing a sizeable majority their promised pensions review has the potential to be more radical and grasp some of the thornier pensions issues. Their manifesto noted this would look to improve member outcomes, ensure schemes take advantage of consolidation, and to increase productive investment in UK markets. Although they dropped plans to reintroduce the Lifetime Allowance, pensions might be seen as a convenient target for ‘stealth’ taxes when fiscal circumstances are tight.

Emma Reynolds has been confirmed as the new pensions minister. Interestingly, she has been appointed to both the Department of Work and Pensions and the Treasury. This may be a deliberate attempt to provide a more joined up approach to policy and dealing with two separate regulatory bodies (The Pensions Regulator and the Financial Conduct Authority).

Isio’s view

We hope the scope and timescale of a pensions review will be clarified quickly. Equally, it will be important to understand what existing pensions policy developments a new Pensions Minister will accelerate, put on the back-burner or bin altogether. Whilst ongoing initiatives such as CDCs and dashboards are likely to continue as planned there are some areas of uncertainty such as extension of auto-enrolment, DB surplus extraction and the PPF as a public sector consolidator. Proposed changes to employment laws will also see extended pay gap reporting requirements and greater policing through a Single Enforcement Body.

Why it matters

Whilst the change in government is unlikely to lead to an immediate change in direction of pensions policies, there could be a re-prioritisation which employers will have to adapt to. We hope to see longstanding policy initiatives finalised quickly, e.g. the new funding code, and areas of uncertainty addressed promptly, e.g. DB surplus extraction. For any changes to employment laws, we hope time will be given for proper industry consultation.
More on the government’s plans for pensions

Investment grade credit spreads at historic lows – time to review?

Background
Investment grade corporate bond spreads have narrowed significantly since the gilt market crisis that occurred following 2022’s mini-budget. With credit spreads now at historic lows, there is little room for them to tighten further, limiting the additional return an investor might expect to receive over equivalent government bonds and providing limited protection against defaults.

Isio’s view

We see the downside risk of holding investment grade corporate bonds being greater than the upside. With spreads more likely to widen than to narrow further resulting in prices to fall relative to government bonds, we see an exposure for pension schemes’ funding positions to deteriorate. We believe there is merit in clients reviewing and reducing their exposure to investment grade credit, or pausing any planned increases.

Why it matters

Investment grade corporate bonds have generally been seen as a key building block of de-risked investment portfolios, primarily due to the asset being perceived as low risk and providing a stable income and linkage to how insurers price insurance transactions. However, from our discussions with insurers we believe the link between corporate bond spreads and insurance pricing currently to be weak, meaning buying investment grade credit prior to insurance may not be an optimal strategy. Sponsors should challenge these preconceptions at current spreads and consider other assets which could provide a better risk-return outlook.

Uncovering the most influential Professional Trustees

Background

With the growing burden of pensions regulation, trustee boards are under pressure to have the right skillsets to run their schemes effectively. Sponsors and trustees are increasingly turning to commercial trustee firms for support. Isio’s annual Independent Trustee survey uncovers the most influential firms and is a must-read for those selecting a professional trustee.

Isio’s view

The professional independent trustee market is thriving and among the most notable trends is the rise of sole trusteeship, including the increasing use of this model by larger schemes. There is also a growing differentiation in firms which ranges from firms that are focused exclusively on trusteeship to those that offer bundled models including a range of governance and support services.

Why it matters

Having skilled and experienced trustees in place can enable faster decision-making and can often ease the burden on the sponsor’s management time. In addition, the Regulator is placing increased focus on the diversity of trustee boards which is further driving the growth in independent trustee appointments. Sponsors should consider whether their existing trustees have the right skills, capabilities and diversity to help deliver their future pensions strategy.

Read the report

What are DC providers planning?

Background

Following the launch of the Mansion House Compact in 2023, there have been increased murmurings from DC providers regarding their plans to incorporate illiquid assets into their default investment strategies. However, the degree of transparency in these plans vary, with few clearly setting out their plans beyond stating “it’s in the pipeline”. Our DC Investment team have spoken to 12 major commercial Master Trusts on their plans for incorporating illiquid assets into their defaults.

Isio’s view

We would like to see meaningful allocations to illiquid assets within DC defaults in the future with a clear plan from providers. We believe allocations should reflect diversification across managers and asset types within the ‘illiquid’ banner. We also hope providers view this as an opportunity to incorporate sustainable themes more boldly within defaults.

Why it matters

Adopting illiquids assets within DC defaults should help improve outcomes for members in retirement, but how providers implement this, and when, will be important. This is a new opportunity for DC providers and we expect to see significant innovation across the market over the coming months. Our series of papers on this over the next year aims to provide transparency in providers plans and adoption of this asset class.

The majority of providers are moving towards a ‘two default’ route, with premium and low cost default options, although all providers are planning on including illiquids assets in at least one.
Find out more about illiquids See our DC market update

Purposeful Run On – senior executives at large scheme sponsors give their view

Background
With UK DB schemes better funded than they have been for decades, employers are considering whether to take the opportunity to remove DB schemes from their balance sheets at the earliest opportunity or seek to benefit from surpluses as they emerge. Against this backdrop, we hosted a roundtable event for senior executives sponsoring large UK DB schemes.

Isio’s view

The main themes emerging from the discussion are shown in our report opposite. In our view, there are several changes that could help turn DB schemes from a “problem” into an “opportunity” e.g. the legislative changes consulted on by the previous Government and better guidance from the Pensions Regulator that reflects the reality of surplus. However, for many schemes surplus can already be released gradually under existing legislation, and sponsors should find out whether this applies for their schemes.

Why it matters
Deciding whether to insure at the earliest opportunity or adopt a Purposeful Run On for the medium to long-term (or something in-between) will be the most financially important decision that most trustees and employers ever agree for their schemes. The views of the sponsor are crucial, but trustees typically hold much of the power in “endgame” discussions. It can be easier to agree the sponsors preferred approach if it is raised early, so it is important for sponsors to quantitatively assess different options.
View report See how we are outpacing change

The appeal for the Virgin Media Ltd v NTL case, which could have implications for schemes that haven’t found relevant S37 certificates, was heard by the Court of Appeal on the 25th June. However, it’s also not clear whether the appeal ruling will clarify the position for all schemes going forward. We anticipate the judgement will be published early Autumn but this has not been made clear yet.

Isio will be hosting its first ever Investment Conference in London this October. We would love for you to join us for an insightful afternoon where we will delve into new innovative investment strategies, societal impacts, and tomorrow’s key asset classes – against the backdrop of the new Labour government in the UK and impending elections in the US. You can register here.

We’ll also be hosting an accounting webinar in Autumn covering what Sponsors should be thinking about from an accounting perspective at the 2024 year-end. If you’d like to receive an invite, please join our mailing list.

Subscribe to IQ

Join our mailing list

Get the next issue of Isio Quarterly delivered straight to your inbox

Subscribe now

The post Isio Quarterly July 2024 appeared first on Isio.

Isio Quarterly April 2024

Daniel Owen — Thu, 18 Apr 2024 10:13:56 +0000

Welcome to IQ

Welcome to Isio’s quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.

Financial conditions update Consultation on DB options New update on life expectancy Latest research on employee benefits Dealing with illiquid assets Looking forward to next quarter

Change since 31 December 2023

Commentary

Corporate bond and gilt yields increased by c. 0.25%-0.3% and long-term inflation by c. 0.15% over the quarter

Credit spreads remained broadly unchanged over the quarter

Equity markets saw a positive quarter (returning c.+8%)

These movements are likely to have improved buyout positions due to reductions in liabilities exceeding reductions in assets

Accounting and funding positions are also expected to have improved in general, other than for well-hedged schemes with low proportions of return seeking assets

Download a deep-dive report

Potentially the biggest shake-up of DB pensions in the last 20 years

Background
The recent government consultation on options for DB Schemes proposes reforms to make it easier to use surpluses to make payments to employers and scheme members on an ongoing basis. In our recent webinar, we were delighted to be joined by a FTSE100 CFO and an experienced professional trustee to explore employer and trustee views on these key consultation proposals – you can find the highlights in this article.

Isio’s view
The proposed flexibility to utilise surpluses could be the most important change for UK DB schemes in over 20 years and could change how the industry views DB pensions – from a source of risk to a source of value. For schemes that don’t want to full insure at their earliest opportunity, we have already developed a framework for sharing surplus between members and sponsors which we call Purposeful Run On (“PRO”). The proposed changes will simplify implementing a PRO strategy and help bring about the required mindset change, but many schemes could start sharing surplus now under existing legislation.

Why it matters
Our modelling suggests that a typical scheme could release, as surplus, almost 20% of its assets over a 10 year period. Under the Isio PRO framework, this would be distributed annually to employers and provide discretionary benefits for members. Even for schemes that are not yet well enough funded to share surplus, having this ultimate objective could affect decisions made today (e.g. regarding investment strategy), so it is important to agree a framework with trustees early.

Discover PRO

A wide range of views justifiable

Background

The Continuous Mortality Index (“CMI”) research body released their latest model and core parameters for projecting future trends in mortality on 18^th April.
Latest data continues to indicate lower life expectancy than previous models – a trend seen since well before the pandemic. CMI also consulted on changes to core parameters that determine how much weight is placed on recent data. The two pandemic years are ignored but in a slightly surprising move, the core parameters reduce the weighting placed on 2022’s data (down from 25% to 15% compared to the last year’s model) and build in only a 15% weighting to 2023’s data. While this still results in lower life expectancies (and liabilities), it is marginal compared to what might have been anticipated.

Isio’s view 

The CMI body states that users need to consider whether the core parameters are appropriate for their specific circumstances rather than just adopting them by default. Indeed there are some that suggest they shouldn’t give a view on core parameters at all. What is clear, is that there is a wide range of views on what the “right” weighting parameters are.

Lower weights would be consistent with a view that the short-term effects of the pandemic still dominate and we’ll soon return to pre-pandemic trends. Higher weights would result from a view that 2022/2023 data reflects the general political, economic and health stresses seen in the UK (and globally) and that higher mortality experience is expected to persist for a few years yet.

Get in touch to find out more

Why it matters 

CMI projections can impact accounting figures, funding valuations, transfer values and buy-out estimates. Higher weightings to recent data could result in a c1% reduction in liabilities compared to the CMI core parameters. Sponsors should interrogate how the latest CMI research is being incorporated by actuarial advisers and whether sufficient consideration has been given to the range of views on key parameters.

Discover who’s benefiting from employee benefits in our latest research

Background

We commissioned YouGov to survey* over 7,500 UK employees on their views about money, work and employee benefits.

Isio’s view 

We’ve long believed that the ‘it was like this when I got here’ approach to employee benefits was suboptimal, but this data conclusively proves the case. Worse, the data suggests that for the average employer, perhaps a third of the value that is spent on benefits simply vanishes in a puff of smoke, because employees don’t like or don’t understand the benefits the money has been spent on. The data also uncovers a strong link between satisfaction with employee benefits and desire to change employer, proving that employee benefits have a very real part to play in addressing staff turnover.

Why it matters 

The findings from our research confirm that there is tangible value for an employer in:

a) designing a benefit package that connects with employee needs
b) communicating that package effectively.
Access our research

*In conjunction with YouGov, Isio surveyed 7,674 private sector employees in June 2023 on a range of issues surrounding employee benefits and personal finance concerns. Responses for don’t know or prefer not to say answers have been removed, unless explicitly shown.

Selling illiquid assets quicker and cheaper than brokers

Background
The extreme volatility caused by the mini-budget in September 2022 led to a surge in sales of illiquid assets on the secondary market. Historically clients have employed the services of a broker to sell these illiquid assets, and paid significant fees in the process – c.0.6%-1.0% on average.

Isio’s view
A large proportion of pension schemes are invested in corporate private debt or infrastructure equity. The secondaries market for these asset classes are relatively new and brokers add limited value given the nascent nature of these markets.
Through our investment research work, we have built up strong relationships with the key private debt and infrastructure equity secondaries buyers in the market. Using this network of buyers, we have created a solution called i-FLO (Isio Fund Liquidity Options) which can disintermediate the brokers and help provide liquidity to clients with competitive execution and significantly lower fees compared to a typical broker process.
Get in touch to find out more

Why it matters
i-FLO can reduce costs, achieve better or similar pricing and do so in shorter or similar timescales compared to a traditional broker. On a recent transaction for a client selling £75m in European direct lending, i-FLO generated pricing c.2-5% better than initial broker quotes, and did so with lower fees and in shorter timescales. If your scheme and trustees are looking to sell down illiquid assets, it’s worth a quick call.

We’re expecting to see the final detail on the new Funding Code from the Pensions Regulator, putting some flesh on the bones of the DWP’s new regulations.

The appeal for the Virgin Media Ltd v NTL case is due to be heard on 25 June, which could have implications for schemes that haven’t found relevant S37 certificates, although the judgement is likely to take a little more time to come through.

We’ll be releasing our 2024 Professional Independent Trustee Survey shortly, highlighting how the key professional trustee firms compare in this growing and evolving market. If you’d like to receive this once it’s available, please subscribe below.

Join the mailing list

Change since 31 December 2023

Commentary

Corporate bond and gilt yields increased by c. 0.25%-0.3% and long-term inflation by c. 0.15% over the quarter

Credit spreads remained broadly unchanged over the quarter

Equity markets saw a positive quarter (returning c.+8%)

These movements are likely to have improved buyout positions due to reductions in liabilities exceeding reductions in assets

Accounting and funding positions are also expected to have improved in general, other than for well-hedged schemes with low proportions of return seeking assets

Download a deep-dive report

Potentially the biggest shake-up of DB pensions in the last 20 years

Background
The recent government consultation on options for DB Schemes proposes reforms to make it easier to use surpluses to make payments to employers and scheme members on an ongoing basis. In our recent webinar, we were delighted to be joined by a FTSE100 CFO and an experienced professional trustee to explore employer and trustee views on these key consultation proposals – you can find the highlights in this article.

Isio’s view
The proposed flexibility to utilise surpluses could be the most important change for UK DB schemes in over 20 years and could change how the industry views DB pensions – from a source of risk to a source of value. For schemes that don’t want to full insure at their earliest opportunity, we have already developed a framework for sharing surplus between members and sponsors which we call Purposeful Run On (“PRO”). The proposed changes will simplify implementing a PRO strategy and help bring about the required mindset change, but many schemes could start sharing surplus now under existing legislation.

Why it matters
Our modelling suggests that a typical scheme could release, as surplus, almost 20% of its assets over a 10 year period. Under the Isio PRO framework, this would be distributed annually to employers and provide discretionary benefits for members. Even for schemes that are not yet well enough funded to share surplus, having this ultimate objective could affect decisions made today (e.g. regarding investment strategy), so it is important to agree a framework with trustees early.

Discover PRO

A wide range of views justifiable

Background

The Continuous Mortality Index (“CMI”) research body released their latest model and core parameters for projecting future trends in mortality on 18^th April.
Latest data continues to indicate lower life expectancy than previous models – a trend seen since well before the pandemic. CMI also consulted on changes to core parameters that determine how much weight is placed on recent data. The two pandemic years are ignored but in a slightly surprising move, the core parameters reduce the weighting placed on 2022’s data (down from 25% to 15% compared to the last year’s model) and build in only a 15% weighting to 2023’s data. While this still results in lower life expectancies (and liabilities), it is marginal compared to what might have been anticipated.

Isio’s view 

The CMI body states that users need to consider whether the core parameters are appropriate for their specific circumstances rather than just adopting them by default. Indeed there are some that suggest they shouldn’t give a view on core parameters at all. What is clear, is that there is a wide range of views on what the “right” weighting parameters are.

Lower weights would be consistent with a view that the short-term effects of the pandemic still dominate and we’ll soon return to pre-pandemic trends. Higher weights would result from a view that 2022/2023 data reflects the general political, economic and health stresses seen in the UK (and globally) and that higher mortality experience is expected to persist for a few years yet.

Why it matters 

CMI projections can impact accounting figures, funding valuations, transfer values and buy-out estimates. Higher weightings to recent data could result in a c1% reduction in liabilities compared to the CMI core parameters. Sponsors should interrogate how the latest CMI research is being incorporated by actuarial advisers and whether sufficient consideration has been given to the range of views on key parameters.

Get in touch to find out more

Discover who’s benefiting from employee benefits in our latest research

Background

We commissioned YouGov to survey* over 7,500 UK employees on their views about money, work and employee benefits.

Isio’s view 

We’ve long believed that the ‘it was like this when I got here’ approach to employee benefits was suboptimal, but this data conclusively proves the case. Worse, the data suggests that for the average employer, perhaps a third of the value that is spent on benefits simply vanishes in a puff of smoke, because employees don’t like or don’t understand the benefits the money has been spent on. The data also uncovers a strong link between satisfaction with employee benefits and desire to change employer, proving that employee benefits have a very real part to play in addressing staff turnover.

Why it matters 

The findings from our research confirm that there is tangible value for an employer in:

a) designing a benefit package that connects with employee needs
b) communicating that package effectively.

*In conjunction with YouGov, Isio surveyed 7,674 private sector employees in June 2023 on a range of issues surrounding employee benefits and personal finance concerns. Responses for don’t know or prefer not to say answers have been removed, unless explicitly shown.
Access our research

Selling illiquid assets quicker and cheaper than brokers

Background
The extreme volatility caused by the mini-budget in September 2022 led to a surge in sales of illiquid assets on the secondary market. Historically clients have employed the services of a broker to sell these illiquid assets, and paid significant fees in the process – c.0.6%-1.0% on average.

Isio’s view
A large proportion of pension schemes are invested in corporate private debt or infrastructure equity. The secondaries market for these asset classes are relatively new and brokers add limited value given the nascent nature of these markets.
Through our investment research work, we have built up strong relationships with the key private debt and infrastructure equity secondaries buyers in the market. Using this network of buyers, we have created a solution called i-FLO (Isio Fund Liquidity Options) which can disintermediate the brokers and help provide liquidity to clients with competitive execution and significantly lower fees compared to a typical broker process.

Why it matters
i-FLO can reduce costs, achieve better or similar pricing and do so in shorter or similar timescales compared to a traditional broker. On a recent transaction for a client selling £75m in European direct lending, i-FLO generated pricing c.2-5% better than initial broker quotes, and did so with lower fees and in shorter timescales. If your scheme and trustees are looking to sell down illiquid assets, it’s worth a quick call.

Get in touch to find out more

We’re expecting to see the final detail on the new Funding Code from the Pensions Regulator, putting some flesh on the bones of the DWP’s new regulations.

The appeal for the Virgin Media Ltd v NTL case is due to be heard on 25 June, which could have implications for schemes that haven’t found relevant S37 certificates, although the judgement is likely to take a little more time to come through.

We’ll be releasing our 2024 Professional Independent Trustee Survey shortly, highlighting how the key professional trustee firms compare in this growing and evolving market. If you’d like to receive this once it’s available, please subscribe below.

Join the mailing list

Join our mailing list

Get the next issue of Isio Quarterly delivered straight to your inbox

The post Isio Quarterly April 2024 appeared first on Isio.

	Now	In 2029
Employer saving p.a.	£750	£300
Employee saving p.a.	£400	£160