Half of defined benefit (DB) schemes are still to set their long-term funding targets as endgame options proliferate, according to research from Barnett Waddingham.
Progress on setting a long-term target varies considerably by scheme size, the consultancy reported, with nearly two-thirds (63%) of small DB schemes having done so, compared to 50% of medium-sized schemes.
Larger schemes were less likely to have set a long-term funding strategy: 46% of large-sized schemes and just 36% of very large schemes have done so.
Ian Mills, partner and head of DB endgame strategy at Barnett Waddingham, said: “The high percentage of schemes yet to formalise their long-term funding targets reflects a market in transition, with trustees reassessing strategy as new options have emerged.
“Many are now deferring longstanding plans to buy out as soon as affordable and considering running on beyond full buyout funding, while alternatives such as DB superfunds are becoming more viable alternatives. Generally speaking, the larger the scheme, the more options are available, so it’s not surprising that smaller schemes are seemingly ahead in finalising their plans.”
“The high percentage of schemes yet to formalise their long-term funding targets reflects a market in transition, with trustees reassessing strategy as new options have emerged.”
The findings come as improved scheme funding levels and market innovation are creating a wider range of viable endgame options for schemes.
However, there is a risk of “drifting” if schemes wait too long to decide on a strategy, according to WTW senior director Ben Johnson.
“Stronger funding has given schemes more options, and it can be tempting to keep them all alive,” he said. “A portfolio built to preserve every route can end up poorly suited to the route the scheme actually takes. Trustees should pin down the outcome they want, then ask what could genuinely stop them getting there.
“Value at risk, tracking error, and funding movements are useful only if they help answer that question. A strategy designed to keep every option open can become a strategy for no option in particular.”
Barnett Waddingham surveyed 50 professional trustees of DB pension schemes and found that, for some of the largest schemes, a period of strategic decision-making is fast approaching, with the next 12 to 24 months set to be a defining period for strategy and planning.
Trustees expect it to take several years to achieve endgame objectives. Average expected timeframes vary significantly, from 5.8 years for small schemes, to 9.3 years for large schemes. The poll found that 51% of large schemes expect it to take between 10 and 15 years to achieve their objectives.
