Welcome to IQ
Welcome to Isio’s latest quarterly pensions update for sponsors, summarising key events from the quarter and looking ahead to what’s coming up.
Change since 31 December 2024
Commentary over the quarter
- Gilt yields have risen by c. 10-15 basis points, with long-term inflation expectations broadly unchanged.
- Credit spreads have increased by c. 10 basis points – thus accounting positions are likely to have improved.
- Global equity markets were down by c. 4-5%.
- Anticipated insurer discount rates are up by 15-20 basis points, exceeding increases in gilt yields. This should improve buyout funding positions for most schemes, other than those with material equity holdings.
- Since 31 March 2025 there has been significant market volatility following the introduction of Tariffs, with both equity sell-offs and increases in bond yields. Our article in this quarter’s IQ explores what Sponsors should do in response. If you have any questions regarding the current volatility please reach out to your usual Isio contact.
President Trump puts the IF in Tariffs
Background
“Liberation Day” has brought a rollercoaster ride for the equity and bond markets, with significant falls and jumps on a daily basis depending on the latest newsflow.
Isio’s view
In our view if full-fat tariffs are reimposed with de-globalisation following, markets could fall further still and volatility would be significant. Even with a full reversal in trade policy, we still expect a material slowdown in global growth as business and consumer confidence falters due to the uncertainty.
Our 2025 investment themes remain valid today. Investors still have the chance to take profits on growth assets and prepare dry powder for a better environment to deploy risk – please see link for a summary of our investment themes.
Why it matters
Trustee advisers should be actively monitoring the situation, but considerations for pension scheme sponsors are:
- Understand the immediate implications for cash funding e.g. post valuation experience or triggers on contingent funding arrangements.
- A scheme’s IAS / FRS basis may behave differently to its primary funding basis, typically having shorter duration (likely small mismatch and slight loss) and higher credit spread exposure (likely large mismatch and small gain).
- The new Funding Code increases focus on sponsor covenant for pension scheme funding. For sectors particularly exposed to tariffs this may necessitate alterations to journey plans.
- Whilst too early to know the implications, it is likely that insurance pricing and volumes will be impacted. Sponsors with schemes closing in on insurance should be aware of potential roadblocks, especially if cash has been promised to bridge any funding gap.
- Keep a close eye on trustee governance arrangements: ensure that there is sufficient LDI collateral, seek speedy and concise communications on any strategy changes.
Investment themes for 2025
Utilising DB surplus
Background
On 28 January the Government confirmed that it will respond to the DB options consultation before the summer. This is expected to include reforms to encourage schemes to run on targeting surplus generation e.g. allowing trustees of all schemes to refund surplus to the employer irrespective of restrictions in scheme rules and potentially lowering the funding threshold for refunding surplus.
Isio’s view
It is a relief that the Pensions Bill will include reforms to make gradual surplus release easier. We are hopeful that the statutory override allowing surplus release will be wide enough to fully remove the current rules lottery and the funding and risk thresholds will be flexible enough to make gradual surplus release relatively common. Professional trustees’ views on the most important reforms to make surplus release more straightforward are shown opposite.
Given the uncertainty in the details and that the reforms may take a couple of years to enact, some employers are working with their trustees to benefit from surplus within existing legislation. In many cases using surplus to offset employer contributions to a DC section is the most viable option – Aberdeen, Aon and Schroders have recently adopted this approach.
Why it matters
Deciding whether to run on over the medium term or insure at the earliest opportunity will likely be the most important decision ever made for your schemes. Once trustees are working towards buy-out they may be reluctant to change course, so we recommend forming a company view and engaging with your trustees as soon as possible.
More insights from our scheme run on survey of professional trusteesNew entrants in insurance market
Background
If we look back over the last 20 years, the number of providers in the market has been relatively stable.
Recently three new entrants have joined the insurance market (Royal London, Utmost and Blumont), increasing the level of capacity following the increase in demand in recent years.
Isio’s view
More insurers in the market leads to more competitive tension in transactions, and that can only be a good thing for sponsors, trustees and members of schemes. This has been especially true at the smaller end of the market, where insurer appetite can be limited at times.
Some of the newer entrants, particularly Royal London and Utmost, are quoting in that smaller end of the market. Blumont have also stated their intention to quote on schemes of all sizes, so really positive news. In order to win business, price alone is not always enough. Different schemes will have different priorities, different things they are concerned about or that are important, or even critical to them. The new entrants know this and are tailoring their offers accordingly.
Why it matters
We always advocate that insurers should only be asked to provide a quotation if the sponsor and the trustees would be willing to go ahead and transact with that insurer. With new entrants, a long track-record won’t be available.
We have seen new entrants be flexible on timing, make commitments that other insurers are not typically willing to do, and explore options of transacting with schemes that might have, for example, unusual or complex benefits, in order to get the transaction to go ahead. This gives the new entrants something which potentially makes them stand out from other insurers.
Why has the number of bulk annuity providers increased?
CMI 2024
Background
The annual update of the CMI’s model on future longevity improvements is due out shortly. A consultation on changes to this year’s model closed on 25 March 2025 with the updated model (CMI_2024) expected in Q2 2025.
The key change is a move away from the ‘weights’ parameters used in previous versions which allowed users to only reflect partial or no allowance for individual years impacted by COVID. Instead this will be replaced by an ‘overlay’ which allows the impact of COVID to tail—off over a period controlled by the user – driven by the new ‘half-life’ parameter.
Isio’s view
Whilst we are broadly in favour of the technical changes to the model, we have concerns over the core value of the new ‘half-life’ parameter and users ‘anchoring’ to this value.
Different users will have different views on how long lasting the impacts of COVID will be and how quickly we might see longevity improvements.
In our view, the core value proposed by the CMI leads to life expectancies that are too high. This is a view we have held for a few years in respect of the core CMI model.
Why it matters
The model will be commonly used in funding valuations for multiple purposes, including cash funding and accounting.
Recent mortality data suggests a small improvement in life expectancies which will come through in higher liabilities. However, adopting a version of the new CMI_2024 model with overly prudent assumptions will lead to overly prudent liabilities.
- DWP responded to a Parliamentary Question, confirming that they recognise that the Virgin Media case “could lead to uncertainty and additional costs”. While no final decisions have been made DWP confirmed that they are “actively considering” their next steps and will provide an update in due course.
- As the market settles following the recent volatility, uncertainty remains, and reduced consumer confidence is expected to impact future growth. We will continue to monitor markets over the coming months.
- The Government has confirmed it intends to respond to the consultation regarding options for DB Schemes in Spring 2025. The proposed flexibility to utilise surpluses could be significant and change how the industry views DB pensions. We will be arranging a number of events once the announcement is made.
-
Change since 31 December 2024
Commentary over the quarter
- Gilt yields have risen by c. 10-15 basis points, with long-term inflation expectations broadly unchanged.
- Credit spreads have increased by c. 10 basis points – thus accounting positions are likely to have improved.
- Global equity markets were down by c. 4-5%.
- Anticipated insurer discount rates are up by 15-20 basis points, exceeding increases in gilt yields. This should improve buyout funding positions for most schemes, other than those with material equity holdings.
- Since 31 March 2025 there has been significant market volatility following the introduction of Tariffs, with both equity sell-offs and increases in bond yields. Our article in this quarter’s IQ explores what Sponsors should do in response. If you have any questions regarding the current volatility please reach out to your usual Isio contact.
-
President Trump puts the IF in Tariffs
Background
“Liberation Day” has brought a rollercoaster ride for the equity and bond markets, with significant falls and jumps on a daily basis depending on the latest newsflow.
Isio’s view
In our view if full-fat tariffs are reimposed with de-globalisation following, markets could fall further still and volatility would be significant. Even with a full reversal in trade policy, we still expect a material slowdown in global growth as business and consumer confidence falters due to the uncertainty.
Our 2025 investment themes remain valid today. Investors still have the chance to take profits on growth assets and prepare dry powder for a better environment to deploy risk – please see link for a summary of our investment themes.
Why it matters
Trustee advisers should be actively monitoring the situation, but considerations for pension scheme sponsors are:
- Understand the immediate implications for cash funding e.g. post valuation experience or triggers on contingent funding arrangements.
- A scheme’s IAS / FRS basis may behave differently to its primary funding basis, typically having shorter duration (likely small mismatch and slight loss) and higher credit spread exposure (likely large mismatch and small gain).
- The new Funding Code increases focus on sponsor covenant for pension scheme funding. For sectors particularly exposed to tariffs this may necessitate alterations to journey plans.
- Whilst too early to know the implications, it is likely that insurance pricing and volumes will be impacted. Sponsors with schemes closing in on insurance should be aware of potential roadblocks, especially if cash has been promised to bridge any funding gap.
- Keep a close eye on trustee governance arrangements: ensure that there is sufficient LDI collateral, seek speedy and concise communications on any strategy changes.
Investment themes for 2025 -
Utilising DB surplus
Background
On 28 January the Government confirmed that it will respond to the DB options consultation before the summer. This is expected to include reforms to encourage schemes to run on targeting surplus generation e.g. allowing trustees of all schemes to refund surplus to the employer irrespective of restrictions in scheme rules and potentially lowering the funding threshold for refunding surplus.
Isio’s view
It is a relief that the Pensions Bill will include reforms to make gradual surplus release easier. We are hopeful that the statutory override allowing surplus release will be wide enough to fully remove the current rules lottery and the funding and risk thresholds will be flexible enough to make gradual surplus release relatively common. Professional trustees’ views on the most important reforms to make surplus release more straightforward are shown opposite.
Given the uncertainty in the details and that the reforms may take a couple of years to enact, some employers are working with their trustees to benefit from surplus within existing legislation. In many cases using surplus to offset employer contributions to a DC section is the most viable option – Aberdeen, Aon and Schroders have recently adopted this approach.
Why it matters
Deciding whether to run on over the medium term or insure at the earliest opportunity will likely be the most important decision ever made for your schemes. Once trustees are working towards buy-out they may be reluctant to change course, so we recommend forming a company view and engaging with your trustees as soon as possible.
More insights from our scheme run on survey of professional trustees -
New entrants in insurance market
Background
If we look back over the last 20 years, the number of providers in the market has been relatively stable.
Recently three new entrants have joined the insurance market (Royal London, Utmost and Blumont), increasing the level of capacity following the increase in demand in recent years.
Isio’s view
More insurers in the market leads to more competitive tension in transactions, and that can only be a good thing for sponsors, trustees and members of schemes. This has been especially true at the smaller end of the market, where insurer appetite can be limited at times.
Some of the newer entrants, particularly Royal London and Utmost, are quoting in that smaller end of the market. Blumont have also stated their intention to quote on schemes of all sizes, so really positive news. In order to win business, price alone is not always enough. Different schemes will have different priorities, different things they are concerned about or that are important, or even critical to them. The new entrants know this and are tailoring their offers accordingly.
Why it matters
We always advocate that insurers should only be asked to provide a quotation if the sponsor and the trustees would be willing to go ahead and transact with that insurer. With new entrants, a long track-record won’t be available.
We have seen new entrants be flexible on timing, make commitments that other insurers are not typically willing to do, and explore options of transacting with schemes that might have, for example, unusual or complex benefits, in order to get the transaction to go ahead. This gives the new entrants something which potentially makes them stand out from other insurers.
Why has the number of bulk annuity providers increased? -
CMI 2024
Background
The annual update of the CMI’s model on future longevity improvements is due out shortly. A consultation on changes to this year’s model closed on 25 March 2025 with the updated model (CMI_2024) expected in Q2 2025.
The key change is a move away from the ‘weights’ parameters used in previous versions which allowed users to only reflect partial or no allowance for individual years impacted by COVID. Instead this will be replaced by an ‘overlay’ which allows the impact of COVID to tail—off over a period controlled by the user – driven by the new ‘half-life’ parameter.
Isio’s view
Whilst we are broadly in favour of the technical changes to the model, we have concerns over the core value of the new ‘half-life’ parameter and users ‘anchoring’ to this value.
Different users will have different views on how long lasting the impacts of COVID will be and how quickly we might see longevity improvements.
In our view, the core value proposed by the CMI leads to life expectancies that are too high. This is a view we have held for a few years in respect of the core CMI model.
Why it matters
The model will be commonly used in funding valuations for multiple purposes, including cash funding and accounting.
Recent mortality data suggests a small improvement in life expectancies which will come through in higher liabilities. However, adopting a version of the new CMI_2024 model with overly prudent assumptions will lead to overly prudent liabilities.
-
- DWP responded to a Parliamentary Question, confirming that they recognise that the Virgin Media case “could lead to uncertainty and additional costs”. While no final decisions have been made DWP confirmed that they are “actively considering” their next steps and will provide an update in due course.
- As the market settles following the recent volatility, uncertainty remains, and reduced consumer confidence is expected to impact future growth. We will continue to monitor markets over the coming months.
- The Government has confirmed it intends to respond to the consultation regarding options for DB Schemes in Spring 2025. The proposed flexibility to utilise surpluses could be significant and change how the industry views DB pensions. We will be arranging a number of events once the announcement is made.
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