DB scheme funding continues to improve
The underlying data are sourced from valuations and recovery plans submitted to TPR both for schemes with deficit positions, and from annual scheme returns for schemes with surplus positions. The update reflects schemes with effective valuation dates falling from 22 September 2020 to 21 September 2021 inclusive.
Highlights in the analysis included:
● 38.7% of scheme in surplus, compared to 27% reported last year;
● 93.7% (median: 95.4%) – average ratio of assets to TPs for schemes in deficit and surplus;
● 109.5% (median: 105.9%) – average ratio of assets to TPs for schemes in surplus;
● 84.4% (median: 88%) – average ratio of assets to TPs for schemes in deficit;
● 5.7 years (median: 5 years) – average recovery plan length for schemes in deficit;
● male: 88.7; female: 91.2 – median life expectancies (years) of future pensioners currently aged 45 for schemes in deficit and surplus.
Kieran Mistry, senior business development manager at Standard Life noted that the figures published in the latest report highlights the “strong funding position” of many pension schemes.
Mistry said “It’s clear that the shifts in market conditions over the past year plus sponsor contributions have come together to benefit the funding positions of many pension schemes. With 39% of schemes in surplus, this is a significant increase from last year’s figures, where 27% of schemes reported a surplus.
“This is a positive picture, and we are observing many schemes turning their attention to how they lock in their favourable positions and reduce risk. It has already been an extremely busy year for the bulk purchase annuity market, and we anticipate this trend will continue throughout the second half of 2023 resulting in a record-breaking year for transaction volumes. Our research also shows that the demand for buy-ins and buyouts is unlikely to slow down, with more than 86% of DB pension schemes expecting to approach an insurer in the next five years.”
Chris Rice, head of trustee services at Broadstone broadly agreed, but noted:
“Things will have improved further since this data was gathered, as a result of rising interest rates. Many trustees and sponsors are now focusing towards the end game – a buyout with an insurer – rather than deficit contributions.
Rice said the “feverish activity in the bulk annuity market reflects the improved funding levels across the DB pension sector” and noted that as schemes reach full funding “buyouts will be targeted next” with demand for pension insurance likely to continue to increase.
David Everett, head of pensions research at LCP, was less upbeat when he suggested: “This year’s analysis of actual scheme funding submissions shows that there has been relatively little improvement, compared with three years prior, in schemes’ reported funding positions, with schemes remaining slightly in deficit on an aggregate basis.”
Everett did note, however, that the latest stats didn’t tell the full story, because “since these valuations were undertaken, with typical valuation dates of 31 December 2020 and 31 March 2021, for many schemes there has been a significant improvement in their funding positions which won’t filter through to the regulator’s statistics for another two years.
Everett stressed that “these latest statistics shouldn’t be taken as a reflection of the current picture.”
Lauren McLaren, partner & head of DB actuarial consulting at Hymans Robertson, said: “The numbers signal an important shift in funding levels and a trend we know will have accelerated into 2023 as government bond yields have increased materially and asset returns have been strong.
“TPR estimates that 76% of schemes with valuations at 31 March 2023 are likely to be in surplus on an ongoing funding basis. Around a quarter of all DB schemes may have sufficient assets to buy out their liabilities with insurance companies; this figure is likely to rise sharply over the coming years.
“These changes raise interesting questions as TPR looks to finalise its DB funding regime ahead of 1 April. It remains to be seen how the changes over the past 12 months bear on the regime that comes into force.
“The latest data underscores that the world has changed significantly since the initial ideas for the revised DB funding code were set out in 2020, and TPR and DWP must take the time to make sure the final regulations and code are fit for purpose. It would be disappointing if the changes distract focus or disrupt well-planned scheme-specific approaches because they’re not flexible enough, or because they place a disproportionate compliance burden on schemes.”
