Pension Schemes: you're in the end game now

If you didn’t get the $1.2bn opening weekend movie reference, it is perhaps time to stop reading and scroll away. I recently saw the movie “Avengers: End Game” with much enthusiasm on the biggest screen in the UK – and it was worth it.

Sadly, however, the title of the movie hasn’t stopped me thinking about its obvious link to my ‘day job’ – working with pension schemes (and their consultants) to help reach their end game. The focus on the end game of DB pension schemes has been steadily increasing as majority are closing and becoming more cashflow negative, than ever before.

While I was tempted to draw parallels to the screenplay of the movie and the journey of pension schemes (some-day I might^* ), it was interesting to draw one parallel which I thought was possibly less talked about. The above-mentioned movie, is about to end a 3-phased, 22 movie saga that has been going on since 2008. Movies before then, were not actively stitched together to lead up to the “end game” on such a scale. When phase 1 started, it did not have the end game in mind (sound familiar?). However, as time went on, producing movies that were linking to the big finale was clearer.

The parallels to the life cycle of DB pension schemes are interesting. The phase 1 of their growth was done without a focus on the end-game as well – it was so far away, that it possibly did not make sense to do so. Phase 2 of their life cycle (i.e. closing to new members) has been ongoing for the best part of 5-10 years. Within it, we had various themes from closing to new members, the setup of DC schemes to the stopping of future accruals, amongst others. This setup the next phase, which would dramatically alter the PSU (Pension Scheme Universe).

Phase 3 – LDI and de-risking, has resulted in arguably the biggest shift in assets since phase 1. The fall in ‘growth’ allocations and rise in LDI and other ‘lower risk’ strategies has been evident for sometime now. This also saw a greater focus on their end game – buy-in, buy-out, self-sufficiency et al and linking portfolio decisions to them. As phase 3 was coming to an end, a new set of topics were emerging. Enter CDI. CDI strategies have arguably had a lot of media coverage in recent years. They have been discussed, in some form or another by a large set of pension schemes – either for possible allocations or appropriateness of them in their portfolio. In any case, the trailer has been seen by a large population. The movie is being watched as we speak – by the first movers. I am still aiming to collate the overall CDI assets in the market, but I suspect they have been materially more than the opening weekend collection mentioned above!

The allocations to various CDI strategies – either core using corporate credit or satellite using structured and real assets, have now become more clearly defined than a few years ago. So as asset managers finalise their CDI offering, and consultants begin to form and finalise their views of it, we are close to the ending of phase 3 of their journey.

While MCU is still tight-lipped about phase 4, for the PSU it is slightly clearer. CDI strategies would start to increase in allocation and become a common part of a pension scheme’s asset allocation – just like LDI has become today. Some schemes would partially or fully outsource to an insurance company (via buy-out or buy-in) and the others will remain self-sufficient. How long this phase lasts, will be a function of various factors – only some of which are market related. As Doctor Strange said, “we are in the end game now”.