05 Jun 2023 3 min read

DB pension schemes, which were in the eye of the market storm last autumn, in our view are now even better placed for their ‘endgame’.


The Pensions Regulator (TPR) estimates that most DB pension schemes have seen improved funding levels over the past year. Indeed, around a quarter may now have sufficient assets to buy out their liabilities with insurance companies (or consider running on for the potential to benefit from future surpluses).[1]

At the end of April 2023, the ‘average’ scheme funding level, monitored in the LGIM Funding Level Tracker, was close to full funding on a buyout basis (97%) – and significantly well-funded on a low-dependency basis (114%).


As a result, schemes are increasingly focused on their endgame strategy, whether that is buyout or a low-dependency run-off strategy, and for those that are already fully funded, how they can best lock in their endgame funding level.

The Pension Regulator’s guidance

Following the Annual Funding Statement 2023, schemes are focusing their approach on three key areas:

1. Reviewing liability-driven investment (LDI) operational resilience

Schemes are being encouraged to review their LDI collateral frameworks to ensure that they give the best chance of being able to withstand the potential for severe stresses in the gilt market. Recent TPR guidance on collateral resilience focused on resilience standards (both an operational buffer and a market risk buffer), maintaining the buffer (and being able to act quickly and effectively in a crisis), and resilience testing (to determine the size of market movement required before a specific event would happen).

As one of the largest LDI managers for DB schemes, we continue to evolve our proposition to help our clients to hedge their liability risks, manage their cash and collateral and seek to generate returns, while focusing on operational resilience, as outlined in our articles Four ways to make DB strategies even more resilient and our 2023 Solutions Outlook.

2. Preparing for an endgame of buyout or run-off

For buyout, engaging with the Pension Risk Transfer (PRT) market is key. For a simple step-by-step checklist, see Legal & General’s article on How to secure DB pensions in a crowded market.

It is also important to focus on improving (and preserving) the buyout funding level, and moving towards a buyout aware investment approach.

An easy first step is to evolve the LDI hedging strategy to reflect the estimated interest rate and inflation sensitivity of the buyout liability. However, buyout liabilities are also sensitive to changes in credit spreads, so expanding LDI to hedge credit sensitivity by, for example, physical credit or credit default swaps, becomes essential in our view (see our blogs The endgame is nigh: time to pay more attention to credit? and Credit where it's due: explicit and implicit hedging for buyout).

For those schemes that are a few years’ away from buyout, it can pay to plan early and be ready to capitalise on future buyout market volatility (see Volatility in the endgame – friend or foe?)

Alternatively, for schemes targeting run-off, we believe an investment approach of ‘investing like an insurer’ in a credit, LDI and growth strategy can seek to generate additional surplus and hedge the buyout funding level over time.

3. Illiquid assets on the route to buyout

Given recent events, schemes may find that illiquid assets are a greater proportion of their assets than originally envisaged and that these holdings may not align with a buyout objective.

Solutions for illiquid assets in buyout are evolving. Insurers are seeking to support schemes by accepting assets in-specie or allowing a deferral of premium whilst assets are run-off, redeemed or sold. Early planning is key to maximise both value (of the illiquid asset) and certainty (of being able to transact).

This blog is an extract from our CIO Outlook. Read our full CIO Outlook.


[1] Source: The Pension Regulator’s Annual Funding Statement 2023

Anne-Marie Morris (née Cunnold)

Head of DB Solutions Strategy

Anne-Marie leads the team responsible for the strategy of objective-driven investment solutions, principally for Defined Benefit Pension Scheme clients. In partnership with the Solutions Portfolio Management team, her team structures and delivers strategies across LGIM’s derivative overlay, LDI and CDI strategies including Buy and Maintain credit. Anne-Marie joined LGIM in 2012, bringing industry experience from prior roles including investment strategy at BlackRock and senior fund manager in structured investments and solutions at Close Brothers Asset Management. Anne-Marie is a CFA charterholder, holds the Financial Derivatives paper from the CISI diploma and graduated from Cambridge University with a first class honours degree in Natural Sciences (theoretical physics). When not eulogising about derivatives and LDI, Anne-Marie might be found exploring historic buildings with her two boys.

Anne-Marie Morris (née Cunnold)

Mathew Webb

Head of Endgame Solutions

Mathew is Head of Endgame Solutions within LGIM's Solutions business and specialises in helping pension schemes achieve their endgame objectives, whether that is buyout (pension risk transfer to an insurer), run-on (investing like an insurer in a credit and LDI portfolio, together with a portfolio focused on surplus growth), or both (run-on for now with the option of buyout later).  Mathew has over 25 years' experience in pensions, insurance and banking markets, having previously worked in pensions advisory, longevity risk transfer and structured products. Mathew is a qualified solicitor (non-practising), holds an MA in Natural Sciences from Downing College, Cambridge University and a Certificate in Quantitative Finance.

Mathew Webb