We perform stress tests for regulators, including for ICAAPs and PRA stress tests. For more on our stress testing, see the 'Risk governance' section.
Climate change scenario testing was developed in 2021 giving us the capacity to simulate risk exposures over an extended time horizon. We are making further
refinements, planned for delivery in 2024. The Trustee adopted a target of net zero by 2050. This target is factored into Trustee decision making.
Risk mitigation
The key tools we use to maintain the above key risk metrics within appetite are:
Key tools | Description |
Investment strategies | The Trustee developed the following investment objectives to reflect their main duty to act in the best interests of Scheme beneficiaries: – To maintain a diversified portfolio of assets of appropriate quality, security, liquidity and profitability to generate income and capital growth to meet, with new contributions from members and employers, the cost of current and future benefits that the Scheme provides – To limit the risk that the assets fail to meet the liabilities – To invest in a manner appropriate to the nature and duration of the expected future retirement benefit payments under the Scheme – To minimise the Scheme's long-term costs by maximising asset returns net of fees and expenses whilst reflecting the objectives above. The investment strategy is regularly reviewed, and its impact on Funding Deficit at Risk is considered. |
Hedging strategies | The Trustee employs asset-liability matching arrangements including the use of liability driven investment strategies, and has a hedging strategy to reduce key market risks, mainly interest rate and inflation risk, but also currency risk. We monitor available collateral and liquidity with the objective of ensuring we have sufficient collateral and/or liquidity available to meet any margin calls. |
Environmental, social and governance (ESG) | The Trustee has established a Sustainability Committee which is responsible for overseeing the Scheme’s policies, regulatory obligations and priorities in respect of climate change and wider ESG related matters. |
We look at the impact on our risk metrics when determining the appropriateness of the investment and hedging strategies.
Risk monitoring and reporting
We monitor pension risk each month and report on it at Pension Risk Forum, ERCC, Pensions Committee and, where thresholds are exceeded (or likely to be), to the
Board Risk Committee and the Board in line with our pension risk appetite. This also includes quarterly monitoring of corporate credit exposures to assess any
concentrations of risk. We discuss any remedial action with the Trustee. In addition, we monitor the performance of third parties who support the valuation of the
Scheme’s assets and liabilities.
PENSION RISK REVIEW
2023 compared to 2022
The underlying level of risk in the Scheme was broadly unchanged in 2023. The Scheme gradually reduced illiquid assets and purchased corporate bonds. The
reduction in illiquid assets is expected to continue in 2024.
Collateral and liquidity reporting enhancements started in 2022 and continued into 2023. In the second half of 2023, long-term gilt yields reached similar levels to
those seen during the gilt market turmoil in the autumn of 2022. The Scheme's collateral and liquidity position were monitored closely. They remained well above
trigger levels that would have required consideration of asset sales or other actions.
We also monitor the potential impact from variations in the IAS 19 position of CET1 capital. There was a moderate impact on CET1 capital caused by movements in
the IAS 19 position in the year. For more on the impact of our defined benefit schemes on capital, see the 'Capital risk' section.
Accounting position
The accounting position deteriorated in 2023. The Scheme sections in surplus had an aggregate surplus of £723m at 31 December 2023 (2022: £1,050m) while
there was one section which had a deficit of £41m at 31 December 2023 (2022: none). The overall funded position was a £682m surplus (2022: £1,050m surplus).
There were also unfunded liabilities of £25m at 31 December 2023 (2022: £25m). The overall deterioration was mainly due to the decrease in credit spreads in
2023, which increased the value of the liabilities. There remains considerable market uncertainty and our position could change materially over a short period.
For more on our pension schemes, including the asset allocation and our accounting assumptions, see Note 30 to the Consolidated Financial Statements.
Maturity profile of undiscounted benefit payments
The Scheme’s obligation to make benefit payments extends over the long-term. This is expected to stretch beyond 2080. The graph below shows the maturity
profile of the undiscounted benefit payments expected to be paid from the Scheme over its life at 31 December 2023:
Annual Report 2023 | Santander UK plc 96 | |||