DB schemes move to formal long-term planning as regulation bites

In an analysis of 245 schemes with combined assets under management of £219bn, the consultancy giant found that DB funds were formalising their long-term targets at scheme valuation dates, reflecting increased regulatory scrutiny, but also more detailed discussions between trustee boards and sponsoring employers.

“Schemes are increasingly putting in place a formally agreed, long-term funding plan or adopting technical provisions assumptions that resemble a long-term funding target,” PwC’s report explained.

“There are still many informal arrangements for a long-term funding plan in existence, [but] these are being increasingly formalised at valuation dates as a result of the discussions between trustees and corporates in order to agree future strategies.”

PwC reported that schemes were adopting lower discount rate assumptions, consistent with longer-term funding targets. They were increasingly considering long-term outcomes, the company added, and many were making detailed plans regarding an endgame – whether through buyout or self-sufficiency.

Four in five (80 per cent) of schemes reported a funding deficit, PwC said, although just more than half (51 per cent) had seen their funding position improve since their previous valuation. On average, PwC found that schemes were 69 per cent funded on a technical provisions basis.

Where scheme deficits had increased, PwC’s research found that 44 per cent of schemes deferred their target date for full funding by three years or more. However, the average recovery plan length remained at around nine years, consistent with the 2018 survey.

Paul Kitson, pensions partner at PwC, said: “This year’s survey really shows that there is no such thing as the average pension scheme.

“Indeed, schemes seem to be falling into two camps: the haves – those that have done well and have been able to reduce the length of their recovery plan at this valuation compared with their previous one, and the have-nots – those that have had to increase their recovery plan length, in some cases significantly.”

The schemes in the first category are becoming concerned about trapped surplus, and are working on how to achieve an efficient endgame in “an increasingly crowded market and with increasingly diverse options”, Mr Kitson noted.

For the latter, “the difficulty is how to get better funded given limitations on employer affordability and an outlook of continued uncertainty”, he added.