Off the Record: Simeon Willis, chief investment officer, XPS Group

As defined benefit funding improves and policy debates intensify, questions are growing over the future direction of pension assets. In this interview, Simeon Willis discusses the shift in scheme strategy, the balance between security and returns, and what consolidation and emerging technologies could mean for advisers and members.

Tom Browne:
People have spoken about a potential half a trillion pounds moving from pensions to insurance. What is driving this reallocation, and what are the implications for scheme members and the wider UK economy?

Simeon Willis:
I think it reflects the reality that there’s an awful lot of money flowing into insurance.

In the past five years, we’ve seen DB pension schemes flip on their head in terms of their financial position. Every year up to 2020, schemes were in deficit on a buy-out basis, and every year since then, on average, they’ve been in surplus.

The current environment is constructive for advisers. Regulatory and tax changes are increasing demand for advice

This has completely changed the mindset. The traditional thinking was to buy out as soon as it was affordable because it was the lowest-risk option. But when schemes find themselves in surplus, they start asking whether this is best for members.

The government has also been proactive, culminating in the Pension Schemes Bill, which looks at how schemes can continue to run in a way that is desirable for members and sponsors.

From a member’s perspective, buy-out isn’t necessarily the path to take because there may be scope for discretionary uplifts if performance is strong. The key question is whether running on can provide sufficient downside protection. The evidence suggests it can, while also offering the potential for additional benefits.

It’s also worth remembering that many pension increases are capped at 2.5% or 3%. When inflation exceeds that, the real value of pensions is eroded, so trustee discretion to uplift beyond those caps has real value.

With pools acting as fiduciary managers, there will need to be strong oversight to ensure accountability

Broadly, around 40% of trustees are heading for buy-out, 20% are undecided and 40% are looking to run on, at least for a period. That shift in mindset has emerged over the past two to three years.

Browne:
As schemes increasingly move towards buy-in and buy-out, how should trustees balance securing member outcomes with the opportunity to generate long-term investment returns?

Willis:
Trustees have to secure members’ benefits. Anything they do to pursue additional return cannot come at the cost of that security.

In the DB market, the scope to invest in the UK government’s productive finance agenda is limited. Assets either back liabilities, provide liquidity or hedging, or generate returns. If they don’t provide liquidity or hedging, they may be better held outside the scheme.

Digital assets are an area to watch. Not cryptocurrencies, but the tokenisation of traditional assets such as equities, bonds and property

There also needs to be a benefit for the sponsoring employer, which is underwriting the downside risk.

Overall, I see DB strategies as low risk, with high levels of security and some allocation to illiquid assets such as private debt, but nothing overly risky. More growth assets are better suited to defined contribution [DC] schemes.

Browne:
XPS has grown rapidly, from 400 people to over 2,000 and into the FTSE 250. What has enabled that growth, and how does it shape priorities for the next phase?

Willis:
There are a number of factors. Regulation has increased significantly, so clients need more guidance and support. The Pension Schemes Bill is one example, but there are also developments such as the funding code and value-for-money requirements.

We’ve also seen a lot of market volatility. The gilt crisis, for example, created uncertainty and increased demand for advice.

Ultimately, better outcomes will come from higher levels of saving and greater confidence in pensions

We’ve invested heavily in technology to improve efficiency and responsiveness. This includes our online funding tool, Radar, and the use of AI in administration to read documents and automate processes.

At the same time, we’ve focused on client service. In senior discussions, we actively consider the impact on members and whether we are delivering the best possible outcomes. That focus on members is central to our approach.

Browne:
With the Pension Schemes Bill and initiatives such as Mansion House and the Compact, is enough being done to channel pension capital into UK growth assets?

Willis:
It depends on your perspective. The House of Lords’ rejection of mandation is beneficial for members. Mandation is unhelpful and unnecessary. That said, the Pension Schemes Bill contains many positive measures. The focus on UK growth assets is mainly relevant to DC and the Local Government Pension Scheme [LGPS].

In senior discussions, we actively consider the impact on members and whether we are delivering the best possible outcomes

The Mansion House reforms show a commitment to private markets, but I’m not convinced this will be a game changer for DC performance. Outcomes have generally been strong without significant exposure to private markets.

There is also a risk that too much focus on UK investment could undermine trust. Ultimately, better outcomes will come from higher levels of saving and greater confidence in pensions.

Browne:
DC and LGPS consolidation continues to gather pace. How do you see this reshaping governance and investment strategy?

Willis:
In the LGPS, the move to pools and regulated entities providing strategic advice is a major change. It creates greater scale in a market that has traditionally had a domestic investment bias.

Governance will also change. With pools acting as fiduciary managers, there will need to be strong oversight to ensure accountability.

We’ve invested heavily in technology to improve efficiency and responsiveness

The traditional model of local decision making will be replaced by more centralised management, supported by independent oversight. That is important because, when responsibility is delegated, trustees can become more distant from the detail, making it harder to assess performance.

Browne:
For advisers and Sipp operators, what should they be watching as pension freedoms, tax changes and client needs evolve?

Willis:
The current environment is constructive for advisers. Regulatory and tax changes, particularly around inheritance tax, are increasing demand for advice.

These changes can be managed effectively with planning, but certain scenarios, such as investments in illiquid assets, can create challenges. XPS’s Sipp and SSAS business works exclusively with advisers and we know advice is highly beneficial for members and helps them navigate these complexities.

In the past five years, we’ve seen DB pension schemes flip on their head in terms of their financial position

Looking ahead, digital assets are an area to watch. Not cryptocurrencies, but the tokenisation of traditional assets such as equities, bonds and property. This could improve efficiency, reduce costs and speed up settlement.

We are already seeing early developments, such as tokenised money market funds. The technology is evolving quickly and, while the timing is uncertain, adoption may happen faster than expected.

Over time, these developments may simply expand the range of investment options, much like exchange-traded funds have done, without fundamentally changing how portfolios are experienced by investors.

Browne:
Thanks for talking to us!