The former is seeking to encourage defined benefit (DB) pension schemes to consider taking more investment risk and allocate to the UK, with the latter concerned with locking down investment risk and securing member benefits.

However, on closer inspection, is it possible that the draft funding code could form part of a new regime that aligns more closely with the Mansion House announcements, and just needs to be expanded to provide trustees with guidance on the circumstances where more investment risk is appropriate?

Regardless of the answer, the key focus is clear – efficient investment. The abrdn pensions master trust can help small schemes achieve this aim. It can also provide a more efficient link between investment and funding strategies, leading to a reduction in funding cost for many schemes.

Mansion House

The Mansion House announcements and associated DWP call for evidence on DB pensions have fuelled debate around whether DB pension schemes should have more flexibility over their long-term objective. In particular, should there be legislative and regulatory changes to make it more viable for schemes to run-off over time, as opposed to the mass herd towards insurance buyout which currently seems likely to be the default route?

The government's motivation is to encourage investment in the UK, which could take a variety of different forms but, in essence, should result in a greater allocation to UK equity and other forms of productive finance than the current £1.4 trillion of DB assets provides for.

To re-risk, target low dependency or buy out with an insurer?

We are expecting more detail on the Mansion House announcements when the chancellor makes his Autumn Statement (expected November 2023). The Work and Pensions Committee is also expected to report back on its conclusions from its ongoing inquiry into the future of DB pensions in early 2024. Depending on the outcome of these key events, this may then lead to further consultations on legislative and policy change.

Given the current uncertainty over the direction of government policy on DB pension scheme funding, it is a challenging environment for pension scheme trustees and sponsors to be making decisions on long-term strategy. Should they be going full steam ahead towards an insurance buyout? Should they be exploring options for re-risking their investment strategy? Should they be taking a ‘wait and see’ approach until there is further clarity on the chancellor’s Autumn Statement and the new funding code?

The new funding code – does it mean loss of control?

Information released to date indicates that schemes will be required to set their funding and investment strategy in such a way that the scheme reduces risk over time towards a ‘low dependency’ target. What this means in practice is yet to be seen, but the Regulator has also indicated a set of ‘fast-track’ parameters that means schemes that are within such thresholds, will receive little to no regulatory scrutiny.

Adopting the pre-determined parameters could be inefficient for many schemes. It may also lead to trustees and sponsoring employers giving up a large amount of the control over scheme strategy. This could also negatively impact the cash funding costs required to close scheme deficits - in other words, place an overly cautious emphasis on the balance between cash funding and anticipated investment returns.

But for schemes that deviate from this and create a strategy bespoke to their unique circumstances, additional documentation and justification of strategy could add to the already burdensome regulatory requirements - fine for large schemes, but perhaps less practical for small schemes.

How can the abrdn pensions master trust help?

The abrdn pensions master trust is well-placed to address all of the challenges set out above. Its investment strategies fit well with current funding regulations but are also well-set to react to any changes that come down the track.

How is this achieved? Through close collaboration with XPS Pensions Group, we have developed a range of investment solutions for the abrdn pensions master trust that can be out of reach for small to medium sized schemes.

These are strategies with a range of returns appropriate for each stage in the funding journey. For example, if your scheme is well-funded and targeting insurance buyout, then there is a model portfolio that closely aligns with insurer pricing. If your scheme has a significant funding deficit and requires more investment return to close the gap, then there is a model portfolio that delivers that with an appropriate reflection of the strength of the sponsor and the maturity of the scheme. Coupled with a funding approach that is designed to reflect the underlying investments and is expected to align with the new funding code, it is possible to improve control of cash funding costs.

The principle is simple, and not a new one. As a scheme matures and its funding level increases, the reliance on contractual yield (providing a match for underlying benefit cashflows) increases. As you can see in our graphic below, this means a gradual rebalancing from growth asset classes such as equities into fixed income assets through time.

Where the abrdn pensions master trust excels is in the implementation. It provides small to medium sized pension schemes with access to a diversified range of fixed income assets – across public as well as private markets.

A key feature across many of these model investment portfolios is that they utilise abrdn’s proven track record and expertise in managing fixed income portfolios to provide efficient investment strategies as a scheme matures. This is achieved through significant allocations to asset classes which provide contractual income, with healthy yield margins over government bonds. This enables schemes to set integrated funding and investment strategies that provide for low volatility and attractive returns.

Mapped to each of the investment solutions are funding assumptions linked to underlying fund characteristics – meaning appropriate, and not overly excessive (or inadequate) prudence margins can be made.

By implementing this through a master trust offering, we are able to provide the analysis required to implement such strategies, as well as the documentation required for regulatory submissions, in an efficient manner. This includes environmental, social and governance (ESG) considerations embedded into investment decisions within all of our funds.

Back in control

The expected return from your pension scheme’s investments can materially impact the cash cost to the employer of funding the benefit provision. Implementing a more efficient investment strategy that is aligned with the long-term objective for your scheme can give you a clearer journey to that objective and potentially reduce cash funding costs along the way, putting you back in control of your DB pension scheme.