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There is a reason your board paper is urgent
I am a trustee of a defined benefit pension scheme, and reports have been tabled showing the scheme now has a surplus. There are also urgent recommendations on de-risking the investments. I am not an investment specialist. Could you explain in layman’s terms what all this means?
DEFINED benefit schemes promise to pay members a pension in retirement related to their years of service and typically their final salary. (These are also known as ‘final salary’ schemes). The investment risk falls on the trustees and the employer, not the members.
Actuaries will calculate the amount needed now to cover the liability for these future pension payments. For a long time, investment conditions caused increasing liabilities and increasing deficits, meaning that more money was required from the employer.
The very low interest rates that followed the financial crisis and Covid were the culprits. Actuaries are guided by these interest rates. If they move lower, then more money is needed now to cover future pensions. If they move higher then less is required now.
The combination of inflation and the disastrous mini-budget under Liz Truss resulted in interest rates going sharply upwards, particularly towards the end of 2022. This is why many schemes suddenly have a surplus. But if interest rates go back down, these surpluses could disappear as quickly as they appeared. Investing in assets that reliably mirror the movements in liabilities would offer protection. One option would be a portfolio of UK government bonds (aka gilts) with appropriate redemption dates. These assets are also low-risk and liquid.
In these circumstances, switching to investments like gilts might be very attractive for the trustees and employers of many schemes but speed is of the essence. This would explain why your board paper on investment de-risking was marked ‘urgent’.
