On the go: The deficit recovery periods of defined benefit schemes with valuations in 2020-21 was impacted by the pandemic-led crisis, with these schemes having a smaller reduction than expected, according to new analysis.
Research from Aon published on Friday, which covers 98 completed valuations carried out by the consultancy for its clients covering dates between September 2019 and June 2020 — classified by the Pensions Regulator as tranche 15 schemes — showed that a recovery plan was required for 63 per cent of these pension funds.
The average recovery period for schemes in deficit was 5.1 years, the same as for tranche 14 valuations.
Generally, this timeline would be expected to be reduced by three years over a three-year valuation cycle.
However, the average tranche 15 recovery period was only 0.7 years shorter than that for tranche 12, when many of the previous valuations of the schemes now analysed were undertaken, the research showed.
“This is a smaller reduction than might have been expected over three years, and reflects the fact that many tranche 15 valuations had effective dates during the onset of the Covid-19 pandemic,” Aon stated.
The financial crisis caused by the global pandemic has also affected the schemes’ funding levels, which stood, in average, at 93 per cent for tranche 15 schemes. Thirty-seven per cent found the scheme to be fully funded on the technical provisions basis.
Despite both numbers being higher than any previous tranche, Aon noted that the figures for tranche 15 mask significant differences between the funding positions of schemes at valuation dates before and after the start of Covid-19, due to “the considerable impact this had on financial markets”.
When looking at schemes with deficit reduction contribution plans, affordability was considered a constraint for 60 per cent of pension funds in deficit in tranche 15, which compares with 65 per cent for tranche 14.
Aon’s research also looked at the relationship between deficit recovery payments and dividends, an area of concern for TPR.
In tranche 15, where DRCs were being paid under the recovery plan, 48 per cent of employers were currently not paying dividends, 30 per cent were paying dividends of less than twice the level of DRCs agreed at the valuation, and 22 per cent were paying dividends above this level.
