Meeting Member Promises

10-second Summary

How should pension schemes be invested to improve chances of paying member benefits in full and on time?

This is the perennial question facing DB schemes as they mature and look to move into a position where they can pay benefits to members without being dependent on more contributions from the corporate sponsor.

This report looks at investment strategy choices pension funds have, by directly measuring their effect on the outcome a DB pension fund is aiming for. We do this by measuring the likelihood of meeting the benefits promised to members in full and on time, and then optimising the strategy to improve that outcome.

This paper provides a number of key insights, and two main conclusions.

1. In order to determine how likely it is to meet member promises there is merit in adding a new lens to track the probability of paying pensions due.
2. We then examined the impact of investing in contractual assets and have proven their value in improving the probability of paying pensions.

The position however varies depending on the funding level of your particular fund. We have looked at what funding levels benefit from pulling specific investment and risk management levers.

Key Insights


1. We can see from multiple industry data sources that cashflow negativity poses an increasing risk to meeting member promises. However, as of yet no real solutions to the problem have been offered to help trustees highlight this risk or track progress against it.

2. A metric which directly measures what funds are trying to achieve – the likelihood of meeting all benefit payments in full and on time – is both possible to calculate and helpful alongside traditional funding and deficit risk measures in making investment strategy choices.

3. Choosing the right investment strategy at the right time can improve the chances of meeting member benefits dramatically. For example, from a 60% likelihood to a 75% likelihood for the same initial funding level and contributions.

4. For funds that are well-funded, buying a cashflow-matched bond portfolio maximises the chance of paying the pensions, assuming maturities can be matched. This has been “conventional wisdom” for many years. We provide a framework to back up this thinking.

5. But for funds that need to generate higher returns, a more sophisticated and more diversified approach which draws upon the full range of liquid and illiquid credit strategies available to today’s DB pension funds is best.

6. The best strategy to deliver benefits with highest probability in any particular case depends on three key things: market conditions; the maturity of the fund; and the target time-horizon to achieve a fully-derisked position. The optimal investment strategy will therefore change over time. A regular review process is essential.