Pandemic damage mitigated as quarter of schemes are in surplus

The report, published on July 28, noted that equity markets fell significantly with the onset of the pandemic in March 2020 and consequent national lockdowns. This led to the FTSE All-Share Returns Index falling by 12.2 per cent during the period in which the tranche 15 valuations occurred.

The Bank of England reduced base rates to 0.1 per cent and announced a new round of quantitative easing to combat the initial shock of the pandemic, while gilt yields fluctuated and the markets generally underwent a period of significant volatility.

Tranche 15 covers schemes with valuation dates between September 22 2019 and September 21 2020. 

Damage not as bad as feared

Despite the unpromising conditions, tranche 15 schemes saw overall improved asset positions compared with tranche 12 schemes, albeit liabilities also increased. The TPR report noted that pension funds that hedged interest rate risk generally performed better than those that did not, or that did less in this area. 

For the 27 per cent of schemes reporting a surplus, the average ratio of assets to technical provisions was 108.4 per cent, while for those schemes in deficit the figure was 82 per cent.

Between tranches 12 and 15, 10 per cent of schemes moved into surplus and 7 per cent moved into deficit. 

The report also noted that around two-thirds (67 per cent) of schemes with valuations in both tranches reported a shortfall of assets against liabilities in both valuations.

Of these, almost three-quarters (72 per cent) saw a reduction in the size of the deficit between tranches associated with a shorter recovery plan in tranche 15, when compared with that agreed in tranche 12.

However, where the reduction is less than three years, it still represented as an extension to the date by which the scheme is expected to be fully funded.

Just over half (55 per cent) of schemes either brought forward their recovery plan end dates or left them unchanged, while almost a quarter (24 per cent) extended their recovery plans by up to three years, and 21 per cent extended them by more than three years.

This led to a median increase in recovery plan end dates of schemes in tranche 15 of 1.9 years over that agreed in tranche 12.

TPR’s report suggested that schemes with longer recovery plans tended to meet one or more of several conditions, such as weaker covenant support, lower funding levels on a technical provisions basis, holding contingent assets, and holding higher proportions of return-seeking assets.

The regulator added that most tranche 15 schemes have less than 40 per cent of assets invested in return-seeking classes, while only one in six had more than 60 per cent invested in those classes. Only 18.7 per cent held one or more contingent assets.

Landscape shifting

Hymans Robertson partner Laura McLaren noted that the report showed funding levels “remained broadly unchanged across the majority of schemes”, and the research conclusion that 45 per cent of schemes had lengthened their recovery plan end dates was not surprising “given the environment”.

“As has been well reported, the impact wasn’t as severe as initially feared. Markets quickly reversed the damage done by the pandemic, although challenges remained across many businesses,” she said.  

McLaren also noted that, despite 21 per cent of schemes extending their recovery plan end dates by more than three years, “average recovery plan lengths are still continuing to fall with the average plan’s less than six years”.

“Of course, the landscape has shifted dramatically in 2022. While 27 per cent of schemes reported a surplus on the technical provisions funding basis at these valuations, in this year’s annual funding statement, the regulator estimated that 61 per cent of schemes currently doing valuations would be in surplus at March 31 2022 as funding has improved,” she continued. 

“Subsequent hikes in gilts yields amid rising inflation are likely to have brought further good news for schemes with less hedging in place, usually those with larger deficits that are further behind in their derisking journeys. Overall, the scheme funding picture is likely to look much improved.”

McLaren added: “With the DB funding regime under review, this evolving view of the DB universe makes for interesting consideration — specifically, in terms of what all this could mean as TPR ultimately looks to set the parameters within the framework when they publish their second consultation later this year.”