The UK government recently published its highly anticipated Pension Schemes Bill, opening the door to more flexible treatment of defined benefit (DB) pension scheme surpluses. While buy-out remains the gold standard for member security, many trustees and finance teams are now exploring if, and how, running-on their scheme could work for the benefit of its members and the sponsor.
If insurance companies can secure member benefits while also generating attractive investment returns on their capital, why can’t pension schemes – especially as, unlike insurance companies, pension schemes do not have to adhere to the strict matching requirements of Solvency II?
However, some pension schemes are finding it challenging to implement an insurance-like investment strategy in practice. We explore the reasons why – but more importantly, how trustees can overcome these challenges.
Investing like an insurance company
Insurance companies follow an approach like the one below, which is typically known as Cashflow Driven Investing (CDI).
Step 1: Buy and hold onto a portfolio of high-quality corporate bonds that will deliver payments in line with the insurer’s pension obligations. When credit spreads are tight (as is currently the case) insurers will also often find other ways to match cashflows that still capture value, and then look to switch these into corporate bonds when spreads widen (more detail on this later).
Step 2: Invest in additional cashflow generating assets, like private credit to boost returns further.
You can now read the full whitepaper at the link below
