Changing pensions landscape spurs data analytics revolution

UK defined ben­e­fit pen­sion schemes look very dif­fer­ent now com­pared to even 10 years ago. The last decade has seen sig­nif­i­cant changes in reg­u­la­tion, invest­ment strat­e­gy, and mem­bers’ ben­e­fits, with schemes shut­ting to new entrants and future accru­al. Many com­pa­nies and schemes will now have a clear focus on an ‘end game’ where mem­bers’ ben­e­fits are secured. While for the very largest this is prob­a­bly still many years off, this change has spurred an evo­lu­tion in man­age­ment of pen­sion schemes and a greater desire for tech­nol­o­gy solu­tions to sup­port this.

“A decade ago, most pen­sion plans were still heav­i­ly invest­ed in equi­ties, result­ing in big short-term fluc­tu­a­tions in fund­ing lev­els,” says Simon Robin­son, direc­tor of prod­uct man­age­ment at Moody’s Ana­lyt­ics. “Tra­di­tion­al­ly, schemes were large­ly dealt with by a pen­sion man­ag­er, sup­port­ed by con­sul­tants and asset man­agers, but this has evolved, with invest­ment strate­gies chang­ing sub­stan­tial­ly and in-house teams on both the com­pa­ny and scheme side increas­ing in size and exper­tise.”

The land­scape for pen­sion scheme risk man­age­ment has also dra­mat­i­cal­ly changed over that time. For many, this has result­ed in a much more close­ly man­aged risk posi­tion, per­haps look­ing more like an insurer’s annu­ity book. For exam­ple, one trend is for schemes to fol­low a cash­flow dri­ven invest­ment (CDI) strat­e­gy where schemes look to close­ly match expect­ed lia­bil­i­ty pay­ments with cash flows from the assets held. This shifts the risk man­age­ment approach towards a much greater focus on the default risk of the assets.

“The risks pen­sion schemes face have migrat­ed from big swings in equi­ty mar­kets to less like­ly but big impact risks like defaults, or more com­plex and sub­tler ones such as when asset cash flows are received, for exam­ple,” says Robin­son.

New risks and con­sid­er­a­tions for pen­sion schemes are con­stant­ly emerg­ing. For instance, the intro­duc­tion of free­dom and choice pen­sion reforms has increased the uncer­tain­ty for schemes of how and when mem­bers will take ben­e­fits. Envi­ron­men­tal, social and gov­er­nance (ESG) risks add lay­ers of com­plex­i­ty, under­scor­ing how the nature of risks will con­tin­ue to evolve in the future.

“Schemes are mon­i­tor­ing cash flow needs on a very reg­u­lar basis. You don’t want to be a forced sell­er of assets because you’ve not planned well enough,” says Robin­son.
Sophis­ti­cat­ed pen­sion schemes are also tak­ing a more holis­tic view of how their schemes would respond to dif­fer­ent risk events. By focus­ing on a broad­er range of risk mea­sures, they are ensur­ing their schemes are less like­ly to be impact­ed by any unex­pect­ed risks that emerge.

“There is an increas­ing demand on trustees in terms of both man­ag­ing data and risks and being seen to man­age them. Smart tech­nol­o­gy is now an essen­tial part of how schemes achieve this,” says Robin­son.

Many schemes are also seek­ing vis­i­bil­i­ty across their entire port­fo­lios. For instance, a scheme might have as many as 30 or 40 dif­fer­ent asset man­agers, and while those indi­vid­ual asset man­agers may dis­close infor­ma­tion about their fund, schemes need to have an aggre­gate view to ensure they gain more insight into what is going on at a broad­er lev­el. This enhanced pic­ture means they can bet­ter spot con­cen­tra­tion risks at a port­fo­lio lev­el or, with the grow­ing focus on ESG and cli­mate risk, allow com­pa­nies to see if they have any unwant­ed off-bal­ance sheet expo­sures that they don’t know about.

“Large schemes are cur­rent­ly col­lect­ing car­bon emis­sions data from all of their asset man­agers with the chal­lenge of both aggre­gat­ing it and deal­ing with incon­sis­ten­cies,” says Robin­son. “Man­ag­ing assets against lia­bil­i­ties is well estab­lished now but the approach needs to encom­pass new con­sid­er­a­tions con­sis­tent­ly. Ulti­mate­ly, if you don’t have an over­ar­ch­ing enti­ty-wide view of the pen­sion scheme, both in terms of assets and lia­bil­i­ties, there are a num­ber of ways you can get tripped up.”

Against this back­drop, some pen­sion schemes are chang­ing the way they approach resourc­ing, too. Where schemes typ­i­cal­ly fol­low a more con­sul­tant-dri­ven mod­el, larg­er schemes have scaled up inter­nal capa­bil­i­ties both in terms of in-house com­pa­ny teams and pen­sion scheme exec­u­tives on the trustee side. One ben­e­fit of hav­ing larg­er inter­nal teams is that schemes can use exter­nal con­sul­tants effec­tive­ly and effi­cient­ly in areas such as idea gen­er­a­tion, solv­ing chal­lenges, reviews, or help­ing to scale up resources for larg­er projects, rather than for low-val­ue work that can eas­i­ly be han­dled in-house, for instance. Cen­tral sources of data and ana­lyt­ics pro­vide con­trol and can help facil­i­tate this new mod­el of work­ing.

Com­pa­nies and trustees of large schemes have recog­nised the impor­tance of hav­ing a greater own­er­ship of the oper­a­tion of their schemes, which can run to a bal­ance sheet of bil­lions of pounds. In-house exper­tise that has access to data and ana­lyt­ics means schemes have over­sight of the infor­ma­tion they need, when they need it, with­out being behold­en to any one third par­ty.

“It’s all about effec­tive man­age­ment of a large, com­plex finan­cial enti­ty,” Robin­son says.
The change in gov­er­nance struc­tures and growth in pen­sion scheme per­son­nel over the past decade has cre­at­ed an oppor­tu­ni­ty for the most for­ward-think­ing schemes to embrace holis­tic ana­lyt­ics tools, to give them greater con­trol over their data and more effec­tive­ly man­age their schemes – enabling bet­ter deci­sions and achiev­ing bet­ter out­comes for all stake­hold­ers.

For more infor­ma­tion please vis­it pfaroe.moodysanalytics.com

Spon­sored by

Moody’s Ana­lyt­ics