PMI SCHRODERS REPORT 2024 : simplebooklet.com

Introduction3Pensions Management InstituteNavigating the key issues facing schemes in 2024In the dynamic landscape of pension schemes, the fourth annual UK pension scheme survey, "Navigating the Key Issues Facing Schemes 2024," conducted by the Pensions Management Institute (PMI) in collaboration with Schroders Solutions, oers pivotal insights into the challenges and opportunities confronting trustees and advisors. This comprehensive analysis of the survey’s ﬁndings and emerging themes aims to inform and guide trustees in their decision-making process in the year ahead.The Fiduciary Management Strategic Forum was created in partnership with the PMI. This group represents many of the third-party evaluation ﬁrms involved in the Fiduciary Management market, along with senior independent trustees. The forum’s mandate is to discuss the key areas aecting pension schemes across all governance models and sizes. This survey analyses the perspectives of UK pension schemes with 102 respondents. The research was carried out via an online survey from 29 November 2023 to 16 January 2024.We hope you enjoy reading the ﬁndings.Welcome to the fourth issue of the annual UK pension scheme survey from the Pensions Management Institute (“PMI”) in conjunction with Schroders Solutions.Ronan O’RiordanHead of UK Business Development, SchrodersAjeet ManjrekarHead of UK Client Solutions, Schroders SolutionsGareth Tancred Chief Executive at Pensions Management Institute

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Foreword4Pensions Management InstituteNavigating the key issues facing schemes in 2024 Key ﬁndingsThe survey, drawing responses from a diverse range of pension schemes, paints a vivid picture of the UK pension industry’s varied landscape. Several key themes surfaced, shaping narratives around the impact of a higher interest rate environment, the interplay between pensions and politics, sustainability, and other signiﬁcant considerations.64%of schemes have seen an increase in their funding level over the past year, with 35% seeing an increase of over 5%: This increase in funding levels suggests that many schemes are moving closer to their long-term funding targets.83%of schemes are deﬁning an endgame strategy, with smaller schemes favouring buyout and larger schemes favouring low dependency: This highlights the impact of the higher interest rate environment on pension schemes' long-term strategies. It indicates a signiﬁcant trend towards endgame planning in the pension scheme landscape and disparities between desired outcomes given scheme size.

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538%Clear shift to ﬁxed income solutions over the next 12 months: With 38% of respondents planning to increase corporate bond allocations and 29% of respondents signalling an intention to increase Liability-Driven Investment (LDI) allocations, there's a clear trend towards ﬁxed income solutions. This shift in asset allocation preferences is indicative of broader de-risking among pension schemes.29%74%of respondents are concerned about the impact of UK politics and policy on the long-term sustainability of pension scheme arrangements: This ﬁnding underscores the importance of political and policy considerations in the management of pension schemes. It also points to a need for trustees to stay informed about political developments and potential regulatory changes. 48% of schemes indicate that liquidity needs have become a higher priority when making decisions: This shift in focus towards liquidity highlights the need for solutions and services that help schemes manage their liquidity needs more eectively.Many trustee groups spent 2023 asking two key questions: Where are we after the LDI event and where do we / the sponsor want to get to? As the survey shows, these have generally been answered and the focus for 2024 will be: How do we get there and what form of asset management will we need to help us achieve this? I can see a lot of manager review, mandate change and implementation ahead.Graham Jung, Professional Trustee, Pi Partnership“”

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6Pensions Management InstituteNavigating the key issues facing schemes in 2024Higher interest rates drive demand for ﬁxed income endgame solutionsOver the past 12-18 months, central banks worldwide have hiked interest rates to curb inﬂation and stabilise economies recovering from the pandemic. This shift has far-reaching implications for pension schemes, aecting their funding levels and steering their strategic decisions.Funding Levels: 64% of schemes witnessed an increase in funding levels over the past year, with 35% experiencing a rise of over 5%. A noteworthy observation is that this surge could be against long-term funding targets, prompting trustees to evaluate their strategies.Decision-Making: As a response to funding changes, 83% of schemes are deﬁning an endgame strategy, with a 53/47 split between buyout and low dependency. The size of the scheme strongly inﬂuences this decision, larger schemes (over £500m) favoured low dependency whilst those under £500m favoured buyout. A noteworthy 78% of respondents are adjusting their return requirements, 83% of which are seeking to reduce their return requirements. The shift to a higher interest rate environment has created a surplus for some schemes, with 1 in 5 considering returning this to the employer.9% Decreased by less than 5%4% Decreased by more than 5%24% No change 29% Increased by less than 5%34% Increased by more than 5%How has the shift into a higher interest rate environment impacted your funding level over the last year?Over the next 12-18 months I expect there will be signiﬁcant innovation with end game solutions and the size/type of scheme they are of beneﬁt to. This coupled with increased optionality on how to use DB pension surplus will allow trustees/sponsors to reassess what the best long term funding target is for their scheme.André Kerr, Partner, XPS Group“”

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7Pensions Management InstituteNavigating the key issues facing schemes in 2024Deﬁning an endgame strategyHow has the shift into a higher interest rate environment impacted your funding level over the last year?What decisions are you considering in response to changes in funding? (Select all that apply)Asset Allocation: Respondents who foresee a shift in asset allocation over the next 12 months, favour increased allocations to corporate bonds and liability-driven investments (LDI), and reducing exposure to equities and illiquid assets. This trend is more pronounced among those targeting a buyout endgame. This is reﬂective of respondents' lower return requirements. As schemes reduce their return expectations, they are moving to assets with lower risk and return expectations. Fixed income and LDI solutions oer several beneﬁts for schemes targeting low dependency and buyout. Fixed income investments, such as corporate bonds, can provide a predictable income stream and help to stabilise returns, making them a suitable choice for schemes with lower return requirements. They also oer lower volatility compared to equities, aligning with the risk proﬁle of these schemes. Furthermore, they can be cost-eective and require less governance compared to other asset classes, which can be crucial for schemes looking to optimise their operations.44%39%66%14%15%10%22%54%% of respondentsBuyoutLow dependencyDecreasing return requirementsIncreasing return requirementsAugment beneﬁtsCross subsidy with DC arrangementsReturn to employerNone of the aboveAdjusting return requirementsDealing with surplus”While there is signiﬁcant focus from schemes to target buy-in and ultimately buy-out, there are signiﬁcant headwinds in terms of insurer capacity, administrator capacity and political/regulatory uncertainty. This may lead trustees to question, is buy-out the only route to securing member’s beneﬁts or are there other viable alternatives?Daniel Walsh, Client Director, Zedra Governance Limited“”Moreover, ﬁxed income investments can be structured to deliver regular cashﬂows, which can be aligned with a scheme's cashﬂow demands, further enhancing their suitability for these schemes.LDI solutions, on the other hand, are designed to match the scheme's assets with its liabilities. This helps to reduce the risk of a funding shortfall and provides a clearer path to achieving the scheme's endgame. By adjusting their asset allocation in this way, schemes can better manage their risk and move closer to their long-term funding targets.

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8Pensions Management InstituteNavigating the key issues facing schemes in 2024Equity Allocations: 38% of respondents indicate a planned decrease in equity allocations over the next 12 months. This reﬂects a strategic shift as schemes seek to manage risk and reduce exposure to market volatility. Corporate Bond Allocations: Conversely, 38% of respondents plan to increase corporate bond allocations over the next 12 months. This aligns with a broader de-risking strategy, emphasising stability and income generation.LDI Allocations: 29% of respondents signal an intention to increase Liability-Driven Investment (LDI) allocations. This reﬂects a heightened awareness of managing liabilities eectively in the pursuit of a secure endgame. Illiquid Allocations: 40% of respondents plan to decrease illiquid allocations over the next 12 months. This adjustment could be a rebalance of portfolios post-gilts crisis or in preparation for a potential buyout transaction.Liquidity Priorities: Indeed, for 49% of schemes, liquidity needs have become a higher priority in decision-making, potentially inﬂuenced by post-gilts crisis guidance from the Bank of England, CSFB, and CBI.How do you see your choice of assets changing in the next 12 months?100%80%60%40%20%0%Equities Hedge funds LDICorp bonds IlliquidsIncreasingDecreasingNo change

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9Pensions Management InstituteNavigating the key issues facing schemes in 2024The shift towards LDI and emphasis on liquidity could also indicate a trend towards reducing leverage and increasing collateral coverage. This would improve schemes’ liquidity and resilience to market shocks, a key lesson from the 2022 gilts crisis. This shift suggest schemes are either learning from past experiences or simply adhering to regulatory guidance. In summary, we expect schemes to continue moving towards lower-risk, lower-return seeking portfolios. The focus is likely to be on ﬁxed income portfolios that oer stability and income generation, with careful management of liquidity and liability risks.How high a priority will liquidity needs be when decision-making in 2024?4% Decreased moderately 1% Decreased signiﬁcantly46% No change 38% Increased moderately11% Increased signiﬁcantly

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10Pensions Management InstituteNavigating the key issues facing schemes in 2024 Current Governance Model: An overwhelming 83% of respondents expressed satisfaction with their current investment governance model. This reveals a robust foundation, but it is imperative to assess the adaptability of these models to changing economic and regulatory conditions.82% No, we are very happy with our current arrangements8% None of the above9% We are considering a change to our current arrangement1% Yes, we would like to move to a tradional advisory from Fiduciary Management Outsourced CIOIs your current investment governance arrangement under review as a direct result of the higher rate environment?Steady governance amid shifting costsWe are seeing the economics behind FM arrangements challenged for some providers. Falling AUM means less revenue for those managers who charge fees based on a percentage of assets. Now is a sensible time for trustees to consider the pricing of their FM services and how this should be structured to ensure this is both equitable and future-proofed against changing market dynamics.Peter Daniels, Head of Fiduciary Manager Evaluation, Barnett Waddingham LLPup“”

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11Pensions Management InstituteNavigating the key issues facing schemes in 2024Fiduciary Management and Advisor Fees: One in ﬁve schemes reported an increase in ﬁduciary management or advisor fees as a percentage of assets under management (AUM), highlighting the need for cost management as schemes shift towards de-risking. Interestingly, just over half of the respondents reported no change in their fees, while a quarter were unsure about the fees they were being charged, indicating a potential area for improvement in fee transparency and communication. Have you seen an increase in Fiduciary Management or Advisor fees as a % of AuM?54% No25% Unsure21% Yes

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612Pensions Management InstituteNavigating the key issues facing schemes in 2024Politics proves worrisome for pensionsThe Mansion House speech, the Autumn Statement, and the upcoming general election could all herald signiﬁcant policy changes aecting the pensions landscape.Impact of UK Politics: An overwhelming 74% expressed concern about the impact of UK politics and policy on the long-term sustainability of pension scheme arrangements. A looming political change within the next 12 months, coupled with new regulatory guidance and reporting requirements, adds to trustees' challenges. Despite the apparent will of the UK government, 86% believe it is not the role of DB schemes to ﬁnance the UK economy. This sentiment is expected to be inﬂuenced by potential regulatory changes, such as the Funding Code, to broader political developments such as the Mansion House speech and Autumn statement.Investment Incentives: The survey explored whether trustees would invest in UK productive assets if incentivised. Bonds, sustainable investments, and public equity were the top preferences among respondents.Do you believe it is the role of the UK DB corporate pensions to assist in ﬁnancing the UK economy?86%No% of respondentsAre you concerned about the impact of UK politics and policy on the long-term sustainability of pension scheme arrangements?74%Yes% of respondentsAsset management has been consolidating for a number of years now. One reason for this has been the rise of ﬁduciary management, where a provider bundles other services like advice alongside ‘running the money’. However, in the last two years, a big driver of further consolidation has been the de-risking and simpliﬁcation of investment strategies. The trend of consolidation is not unique to the pensions industry. Our recent Global Asset & Wealth Management Survey highlighted that 73% of asset managers are considering a strategic consolidation with another asset manager in the coming months in order to gain access to new segments, build market share and mitigate risks.Keira-Marie Ramnath, Head of Investments, PwC“”

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13Pensions Management InstituteNavigating the key issues facing schemes in 202428%12%45%25%33.3%19%51%25%None of the aboveReal estate debtSustainable investmentsInfrastructure debtInfrastructurePropertyBondsPrivate equityIf you were incentivised via tax breaks or other mechanisms would you invest in any of the following UK productive assets? Select all that apply. 33.3%Public equity% of respondentsConsolidation Options: As we navigate the interplay between pensions and politics, one area of focus is the role of consolidation in the pensions landscape. Trustees rated their understanding of various consolidation options, with ﬁduciary management, DB master trusts, and superfunds topping the list. Notably, ﬁduciary management was by far the best understood consolidation option, with two-thirds of respondents stating their understanding was good or very good. However, for all other options, at least one in ﬁve respondents said their understanding was poor or very poor, with Outsourced CIO and Capital Backed Journey plans being the least well understood. This reﬂects the increasing importance of understanding consolidation strategies in the current landscape and indicates areas where further education may be beneﬁcial.a) Fiduciary Managementb) Outsourced CIOd) Capital backed journey plansc) Commercial consolidatorsf) Superfundsc) DB Master TrustHow would you rate your understanding of the below consolidation options for pension schemes?100%80%60%40%20%0%NeutralGoodVery good70%50%30%10%90%Very poorPoor

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Pensions Management InstituteNavigating the key issues facing schemes in 2024Sustainability back on the agendaSustainability, which took a backseat for many schemes in 2023 as they addressed the aftermath of the gilts crisis, is ﬁrmly back on the agenda for 2024. Responsible investment is important, but there are calls for a balanced focus on ESG. While 47% agreed that sustainability is high on their agenda and 44% have developed an action plan to address sustainability, only 23% expressed willingness to allocate capital to support the UK climate and renewable agenda. DB assets may not be the signiﬁcant source of funding for the UK's energy transition that the government hopes for.NeutralDisagreeStrongly disagreeSustainability is high on our agendaWe are willing to invest money to support the UK climate and renewable agendaWe have developed an action plan to address sustainabilityStrongly agreeAgree100%80%60%40%20%0%70%50%30%10%90%14Sustainability took a back seat as Trustee Boards grappled with the pandemic and then the gilts crisis. Although 47% of Trustee Boards are willing, the focus on endgame planning could be another priority that gets in the way of meaningful and impactful progress.Melanie Cusack, Client Director Zedra Governance Limited“”

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16Pensions Management InstituteNavigating the key issues facing schemes in 2024 • Administration and Data Management: Trustees are prioritising administration, data cleansing, and preparing for pensions dashboards while addressing cybersecurity and data protection concerns.• Insurance and Buyouts: Issues related to buy-ins, buyouts, and self-suciency are top of mind, with capacity in the insurance market and the journey to buyout being key concerns.• Governance and Regulation: Changes in governance, regulatory overload, and preparations for new funding regulations and the General Code are signiﬁcant challenges.• Member Communication and Involvement: Trustees are emphasising communication, member outcomes, and understanding, with some expressing a desire for member-nominated trustee board membership.• Fraud and Cyber Risk: Trustees are vigilant about pension fraud and cyber threats, emphasising the security of IT systems.• Other Themes: Public consolidation potential, desire for less regulatory interference, and the changing perception of Buy Out as the only "gold plated" option are additional considerations.Other themesBeyond the main themes, the survey uncovered additional crucial considerations for trustee boards in 2024:

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18Pensions Management InstituteNavigating the key issues facing schemes in 2024 1. Evaluate Endgame Strategies and adapt asset allocation: With a substantial proportion deﬁning endgame strategies, carefully consider the implications of buyout versus low dependency, keeping in mind scheme size. Align asset allocation with your endgame target, emphasising corporate bonds and LDI, especially for schemes targeting a buyout endgame.2. Manage costs and liquidity needs : Given the trend towards de-risking, closely monitor ﬁduciary management and advisor fees to ensure they align with the simpliﬁed solutions being pursued. Acknowledge the increased importance of liquidity in decision-making and incorporate it into investment strategies.3. Stay Informed on Political Developments: Keep a keen eye on political developments and potential regulatory changes, especially those related to the Funding Code and Mansion House.4. Understand Consolidation Options: Develop a deep understanding of consolidation options, including ﬁduciary management, DB master trusts, superfunds, commercial consolidators, and capital-backed journey plans.In conclusion, the landscape for UK pension schemes is dynamic, and trustees must navigate through a myriad of challenges and opportunities. This research paper aims to empower trustees with insights and recommendations, helping them steer their schemes toward sustainable and successful outcomes in the face of an evolving environment.Recommended Actions for TrusteesConsidering these ﬁndings, trustees are encouraged to consider the following actions:

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20Pensions Management InstituteNavigating the key issues facing schemes in 2024About the studyThis survey analyses the perspectives of UK pension schemes with 102 respondents. The research was carried out via an online survey from 29 November 2023 to 16 January 2024. Throughout the report, we complement our ﬁndings with commentary and insights from Schroders Solutions and industry experts.Breakdown by investment governance model22% Full ﬁduciary management / Outsourced CIO9% Partial ﬁduciary management / Outsourced CIO69% Traditional advisory

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22Pensions Management InstituteNavigating the key issues facing schemes in 2024Important Information Marketing material for professional clients only. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice, or investment recommendations. Any reference to sectors/ countries/ stocks/ securities are for illustrative purposes only and not a recommendation to buy or sell any ﬁnancial instrument/ securities or adopt any investment strategy. The views and opinions contained herein are those of the individual to whom it is attributed and may not necessarily represent views expressed or reﬂected in other Schroders communications, strategies or funds. No Schroders entity accepts any liability for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise). The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse eect on the value, price, or income of investments.This document has been issued in February 2024 by Schroders Solutions, a division of Schroders IS Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (Firm Reference No. 195028; registered in England and Wales No. 03359127) and is a subsidiary of Schroders PLC (registered in England and Wales No. 03909886), with its registered oce at 1 London Wall Place, London, England, EC2Y 5AU.

PMI SCHRODERS REPORT 2024

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