‘Wide variation’ between pension scheme funding levels – Aon
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Average funding positions of defined benefit schemes are at their highest levels since the start of the current funding regime, but there is a wide variation between schemes, an analysis of completed valuations has found.
A funding analysis of 129 completed valuations by consulting firm Aon found the average technical provisions funding position of 97%, as well as the proportion of schemes in surplus of 47%, are at their highest levels since 2005, reflecting changes in gilt yields since 2022.
Aon also found that since the dates of these valuations, average funding levels have remained relatively stable, but said “there is a wide variation between schemes”. Those schemes most exposed to gilt yield changes are likely to have improved their funding positions significantly, while hedged schemes might have benefitted less from the changes.
Matthew Arends, partner and head of UK pension policy at Aon, said the analysis shows that the average funding position of schemes is as good as it has been since the start of the current funding regime.
"And schemes are managing their risks, with 68% having a long-term funding target while 76% take an integrated approach to risk management. It remains to be seen whether and how the new Funding Code and the Mansion House pension reforms change the picture in future.”
The analysis shows that 91% of pension schemes hedged at least 70% of their interest rate risk, and nearly as many (88%) hedged at least 70% of their inflation risk. Three years ago, this was just 81% of schemes for both types of hedging.
About two-thirds (68%) of schemes had a long-term funding target alongside their TP funding target, with most of these (60%) having set out a journey plan towards their LTO.
Among tranche 17 schemes, most aim for some form of self-sufficiency or low dependency. About a fifth (21%) target self-sufficiency on a gilts flat basis, 17% self-sufficiency on a gilts + 0.5% basis and 10% aim for self-sufficiency on a gilts +0.25% basis. A small percentages using different funding bases for achieving self-sufficiency, while 41% look to achieve buyout.
The majority (51%) of schemes looking to become self-sufficient have a plan to do this in five to 10 years, and almost all (95%) of schemes rely on asset outperformance to reach their long-term funding objective, while some also cite increasing maturity (47%), additional contributions (26%) and liability-management exercises (10%).
Many (63%) underfunded schemes now have additional security in place – according to Aon, this is the highest percentage to date. The average recovery period is now 4.3 years, 1.2 years shorter than three years ago.
Aon notes that the proposals of the so-called Mansion House reforms could create further endgame options, creating a legislative framework for DB ‘superfunds’ or proposing that the Pension Protection Fund become a consolidator for schemes of solvent employers.
Would you consider passing your scheme to a superfund or PPF-run consolidator?