Detailed analysis of triennial valuations with due dates up to January 2021 shows that almost one in three defined benefit and hybrid schemes are in surplus, but many pension funds face a headwind due to falling interest rates.
In its latest Scheme Funding Analysis, published on Tuesday, the Pensions Regulator revealed that 31 per cent of the tranche 14 schemes schemes reported a technical provisions funding basis surplus.
The annual assessment identifies funding trends based on schemes that had effective valuation dates between September 22 2018 and September 21 2019.
The majority of schemes experienced a growth in assets that exceeded growth in liabilities between tranche 11 and 14 valuation dates, representing a 4.4 per cent increase of funding levels compared with tranche 11.
The figures are a pre-pandemic snapshot, but show that over the period a lot more schemes were in surplus and that there was also improvement in the covenant of sponsors of schemes in deficit
Chris Bunford, LCP
The average ratio of assets to technical provisions for tranche 14 is 91.4 per cent, TPR said. Of the schemes in surplus, the average funding level was 109.1 per cent, while those in deficit had an average funding level of 83.8 per cent.
At the median, scheme assets grew by 18 per cent, whereas technical provisions grew by 12 per cent. The median relative change in deficits for all schemes is -31 per cent, with around 67 per cent of all pension funds experiencing a reduction in deficit over the period.
TRP said that equity markets “performed positively during the inter-valuation period”, aiding schemes in their deficit reduction. Relative to the effective date of many tranche 14 valuations, the FTSE All-Share Index realised a three-year total return of 32 per cent.
“Throughout much of the period between March 2016 and March 2019,” the analysis stated, “government gilt yields fluctuated reflecting market volatility and uncertainties, first around the Brexit referendum and later over the period of transition”.
“The real 20-year spot rate of interest, already in the region of negative yields during the previous valuation period, remained negative (-2.5%) towards the end of the tranche 14 valuation period,” it added.
Falling interest rates raise concerns
But while the headline figures indicated positive movement, concerns have been raised surrounding falling interest rates.
Chris Bunford, principal in LCP’s research team, told Pensions Expert the “headwinds that pension schemes have had to battle against falling interest rates is clear”.
He said: “This can be seen by the fact that average contributions to schemes in deficit remain at similar levels to three years ago.”
Compared with tranche 11, average annual deficit reduction contributions as a proportion of technical provisions for tranche 14 are relatively unchanged.
Bunford added: “The figures are a pre-pandemic snapshot, but show that over the period a lot more schemes were in surplus and that there was also improvement in the covenant of sponsors of schemes in deficit.
“This may have cushioned the impact of the pandemic for many schemes.”
He also noted that there “has also been a decrease in the amount of schemes using contingent assets, with 16.1 per cent currently using them compared to 18.9 per cent three years ago”.
“With the increased interest in using these assets as a result of regulatory changes, we think more schemes now have them in place,” he added.
Recovery plans on downward trend
Additionally, the analysis showed that the recovery plan length is significantly down. The median length for tranche 14 schemes is 5 years, down from 7 years at the previous valuation.
Hundreds of DB sponsors to face hike in contributions
Around 300 sponsors of defined benefit schemes will have to increase their deficit recovery contributions by at least 25 per cent, according to analysis from LCP.
The majority of schemes have less than 40 per cent assets invested in returns-seeking classes, with fewer than one fifth having more than 60 per cent of their portfolio allocated to these type of assets, representing a decrease in growth investments.
Average discount rates have dropped significantly, by around 1 per cent, over the three years. Bunford noted that it is interesting that this has not had a more negative impact on scheme funding.
Overall, while the analysis shows that funding levels in tranche 14 are greater across all percentiles of the distribution in comparison with tranches 11, 8, 5, and 2, the backwards-looking review does not encompass the effects of the pandemic – which will make for stark reading at the next instalment.
