Keep on running? UK pension funds discuss run-on as funding levels improve
The 39 UK corporate pension funds surveyed in the third quarter of 2024 continued to prioritise end-game strategies, particularly buy-in deals. Meanwhile, pension consolidators ramped up their private market activity, establishing long-term asset funds in response to government drives for greater private market investment.
MandateWire reported on 12 buy-in deals worth a collective $5.5bn completed in Q3, an increase on the $4.5bn recorded in Q2.
The uptick in volumes can be attributed to three billion-dollar deals, the largest of which was concluded by the £1.6bn ($2.1bn) Coats UK Pension Scheme.
In September, it announced it had agreed a £1.3bn ($1.7bn) buy-in with Pension Insurance Corporation, securing the liabilities of more than 18,000 scheme members.
The deal followed a £350mn ($468.2mn) buy-in with Aviva in 2022, which covered 3,700 pensioners’ benefits.
PIC also completed a £1.2bn ($1.6bn) deal with the Total Energies Pension Plan, its second with the pension plan following a £1.6bn ($2.1bn) contract inked in 2014.
The third of the billion-dollar transactions was a £1.1bn ($1.5bn) contract between the SCA UK Pension Plan and Legal & General.
Despite the quarter-on-quarter increase in transaction volume, the number of bulk insurance deals completed in Q3 (12) was below the 16 recorded in Q2. That drop in deals coincided with greater discussion around scheme run-on.
Keep on running
According to the Pension Protection Fund, the aggregate surplus (total assets less s179 liabilities) of the schemes in the PPF 7800 Index* was estimated to be £476bn at the end of September 2024. The position was an improvement from a year earlier, when a surplus of £424.8bn was recorded, and a vast improvement on the £117.6bn deficit recorded five years earlier.
Hymans Robertson’s Calum Cooper told MandateWire Analysis in July that funding levels have transformed so significantly that the median closed defined benefit pension scheme can now afford to transfer to an insurer, but for funds of significant scale, he expects around half to opt for run-on.
WTW’s head of retirement Rash Bhabra also told MandateWire Analysis that run-on discussions were increasing.
“Only two years ago, the idea of a pension scheme running on was not even on the agenda despite [an] improving funding position, but that has changed with a number of large schemes saying they are considering the idea.”
Whether the end game is run-on or buyout, the consultants MandateWire spoke with said illiquid assets should form part of a scheme’s portfolio.
“A longer time period does change the way trustees and investment consultants should start to think about the opportunity cost of not having certain assets in their portfolio,” Alasdair MacDonald, chief investment officer of UK investment advisory at WTW, said.
Assets that would be particularly appealing are those that could be transferred to an insurance company, should a scheme decide to go to buyout. “For example, debt which is being used to fund new infrastructure is an asset class which insurers also love,” he added.
Master trusts
Illiquid assets were an area of focus for the five master trusts MandateWire surveyed in the quarter. In July, the Legal & General Mastertrust, with £28bn ($37.5bn) in defined contribution assets, launched its private market platform, targeting areas such as residential property, science and technology, and clean power.
In the same month, the over £6bn ($8bn) Smart Pension reported it was looking to create its own long-term asset fund, having reached significant scale following its takeover of the £545mn ($729.1mn) Options Workplace Pension Trust.
CIO Paul Bucksey said the trust was looking for a manager to oversee a private market allocation, which covers private infrastructure, private equity, natural capital as well as “anything illiquid that we might want to do”.
Similarly, Mike Condron, chair of the trustee board at the £29bn ($38.8bn) People’s Pension, told MandateWire in September: “We have been looking at private markets for some time and we are now approaching the scale where we believe we will be able to invest in them effectively.”
CIO Dan Mikulskis noted that as the master trust approaches the £30bn ($40.1bn) in assets under management mark, it has built the scale to start seriously considering investing in private markets.
He said as well as hiring investment team members to make the investments possible, the master trust was working with commercial asset managers and asset owner peers “with a view to putting top-class proposals in front of our trustees to allocate a portion of our assets to private markets”.
*The PPF 7800 Index tracks the level of underfunding risk in the PPF-eligible universe using the latest scheme return information provided to The Pensions Regulator and the roll-forward methodology used for PPF levy purposes.
