80% of DB schemes to hit long-term funding goals within 9 years

The PwC survey, which covered approximately 40 per cent of all UK DB schemes by asset value, received 365 responses from schemes with assets of around £600bn in total. 

Of those surveyed, 44 per cent were from schemes with assets totalling less than £300mn, 47 per cent from “mid-sized” schemes, and 9 per cent from schemes with assets valued greater than £5bn.

The majority of the DB schemes have already implemented a long-term funding target (80 per cent). 

Eighty-five per cent of schemes with assets of less than £300mn and above £5bn believed they will reach the target within nine years, but 75 per cent of the medium-sized schemes expect to reach their target within the same timeframe. 

Two-fifths (41 per cent) of the schemes surveyed planned to reach their long-term funding targets solely relying on asset returns. Additionally, 8 per cent said they have faced off all investment risks and are relying on sponsor contributions alone to reach their long-term funding targets.  

Half of schemes surveyed said they had no formal agreement with the scheme’s sponsor to ensure the success of achieving their long-term funding targets. This would mean that there is no responsibility from sponsors to pay extra funds, should the scheme fall behind.

For the half of the schemes that do have a formal agreement with their sponsors, a third created a contract for the sponsor to fund the scheme to the long-term target, with a flexible timeframe. Seventeen per cent of these schemes had set a specific timeframe for their long-term targets.  

John Dunn, head of pensions funding and transformation at PwC, said: “Members and the regulators of DB pension schemes can take comfort that many trustee boards are already building robust long-term funding plans to help ensure pensions are paid in full.

Dunn suggested a possible issue in a lack of sufficient capacity in the insurance market to execute schemes’ buyout plans. 

“If the results of our survey are replicated across all 5,000-plus DB plans, we will need to see around £100bn of insurance transactions a year for the next nine years,” he said.

“In contrast, the average annual volume of insurance transactions is currently around £30bn. 

“If capacity continues to be constrained at current levels, this could turn buyout into a sellers market and the cost of insurance may rise.”

Dunn added: “Those schemes that can get to market early — what we call being ‘trade ready’ — may avoid prices moving away from them.”

On July 26, the government published its consultation into DB funding, which asked for responses to plans for DB schemes to be funded in such a way that they are in a state of “low dependency” on sponsoring employers.