Solutions outlook 2025: Time to think strategically

Read our full Solutions outlook 2025.

Growth is back on the agenda. In her November mansion house speech, the Chancellor discussed “plans to create Canadian and Australian-style ‘megafunds’ to power growth in our economy”. In addition to the DC and Local Government Pension Scheme focus, there was a nod to insurers: “The PRA, the Treasury, and the National Wealth Fund will work together to crowd in investment by insurers in productive assets.”

While DB funds were not specifically mentioned at this stage, the merits of thinking strategically around growth are very much front and centre on scheme agendas, with formal feedback around surplus extraction likely to arrive in 2025. Certainly, with DB assets of c.£1.2 trillion and over a third of schemes (by value) being in surplus on a buyout basis, as at 31 March 2024[1], there is much to think about.

Although we await the announcement of the finer details around surplus extraction, for those schemes that are choosing to run on and seeking to extract surplus, we recognise the necessity of mutually agreeable guardrails for both the sponsor and trustees. In this vein, we expect there to be practical workable solutions, which we introduce in No more natural guard rails? 

Meanwhile, we already have a good idea around a plausible strategy for surplus extraction based on our long-term asset liability modelling and outline this in Unlocking surplus in the endgame. We conclude that for schemes with sufficiently high funding levels and thresholds for extraction, security and surplus are both possible.

Moving on to investment markets, schemes are well aware that traditional investment grade spreads are low versus history. But as we describe in Playing the ‘weighting’ game, there is much more beneath the surface for schemes to weigh up and our research suggests that even at lower credit spreads, a range of long-term credit investments still have their place in DB portfolios whether they are derisking or looking to generate surplus.

As schemes look to 2025, we believe that they need not be fearful of illiquid assets if their circumstances or strategy changes, including if a buyout or buy-in is being executed. In Illiquidity innovation, we outlook how private market transitions can build on similar concepts used in public market transitions, while allowing for key differences.

Schemes will need reflect on all of the above factors strategically as they weigh up their endgame options. Trustees will also need to consider carefully what strategic decisions to retain and what to outsource.

On that note, the new DB funding code is now live. For their low dependency investment allocations, schemes now have to demonstrate investment strategies that are sufficiently liquid to meet cashflow requirements and highly resilient to short-term adverse changes in market conditions.

Our observation is that governance structure will be key, and so a delegated approach could be the way to go to seek to meet these regulations and anything else that might await us as we move through 2025.

Read our full Solutions outlook 2025.