Despite pressure from the Pensions Regulator, three quarters of defined benefit (DB) pension scheme trustees say that long-term funding targets have not yet been set for their schemes. The findings from the research from Charles Stanley Fiduciary Management reflect an industry in a state of flux.
At the point the new DB Funding Code came into effect in September this year, 74% of trustees said that long-term funding targets have not yet been set across their schemes. This rises to 81% of trustees when asked about their small-sized schemes. Just 23% of trustees of medium and large-sized schemes expected to have a long-term funding target set within the next 12 months, demonstrating the scale of the problem despite imminent regulatory change.
Similarly, the majority of trustees say that some of their pension schemes have recently changed their funding targets. Across all schemes, an average of 68% of trustees have said they’ve had schemes change their long-term funding targets over the last 12 months. This stands at 76% of trustees’ medium-sized schemes, and 75% of small sized schemes. Large sized schemes were less likely to have changed their funding targets, with a 53:47 ratio of changed to not-changed.
When asked about which funding targets they expect to be set by their schemes, over two fifths (43%) of trustees expect their large-sized schemes to target superfund consolidation. A fifth (21%) of trustees expect their medium and large sized schemes to target self-sufficiency. Buy-out via an insurer is expected by 36% of trustees to be the funding target for their mid-sized schemes.
In terms of timeframes for schemes achieving their funding targets, trustees are inclined to think long term. As many as 45% of trustees believe it will take their medium-sized schemes over 10 years to reach their funding targets. This is despite the average time for FTSE350 schemes to reach a sufficient level of funding sitting at 5.2 years, according to consultancy Barnett Waddingham. A third (32%) believe their small-sized schemes will reach their funding targets in over 10 years.
Barnaby Low, Senior Portfolio Manager, Charles Stanley Fiduciary Management comments: “With the pensions industry in a state of flux – new funding code, new government, seismic market shifts, and potential further regulatory changes to come – it is perhaps understandable that many trustees have not yet set long-term funding targets. Around 40% expect to target superfund consolidation - a reality still in its infancy - and a third still expect to ultimately buy out, This could take many years even for well-funded schemes, given insurers’ capacity constraints. In this environment, it is important to have a strategy that allows flexibility where needed - for example, running on for the short term, with a view to buying out at a more suitable time. All schemes, regardless of size, should work to achieve a goal which is in the best interests of both members and sponsors.”
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