Using data effective as at 31 December 2018, the findings reveal that contributions are no longer sufficient to meet regular benefit payments for 75% of schemes, an increase of over 5% since last year, with the average scheme having net annual outgoings of around £3 million. This reflects the increasing maturity of schemes and also an up-tick in pensions transfer activity.
The findings also reveal a one-year reduction in assumed life-expectancy at age 50, resulting in scheme funding positions improving over the year, with an average accounting deficit of 7% of assets – half of what it was two years ago. These life expectancy changes now appear to be part of an established trend, perhaps reflecting changes in behavior and in medial advances.
This combination of improved funding positions and greater cash flow needs is driving increased innovation in pension schemes’ asset allocation, in areas outside of ‘traditional’ pension scheme investments. Now may be a good time to be moving a scheme to a ‘steady state’ position, reducing risk and reducing the likelihood of increases to cash contribution requirements.
Although the landmark High Court ruling in October 2018 to equalise GMP benefits for men and women is estimated to impact up to 5 million people across the UK, Buck’s latest review highlights that there is likely to be a modest effect on the liabilities of pension schemes. Whilst in extreme cases pension scheme liability values may increase by 5% or more, for a typical scheme the impact is more likely to be around 0.8%.
Other key findings from the mid-market review include:
• Average annual company contributions decreased from £5 million in 2017 to £4.2 million in 2018, reflecting actions taken by companies to manage pension costs.
• The price of insurance products – such as ‘buy-in’ or ‘buy-out’ – has reduced due to life expectancy trends and market competition, with a 70% median funding ratio at 31 December 2018, compared to 66% as at 31 December 2017.
Vishal Makkar, Head of Retirement Consulting, Buck, says: “The past year has been incredibly busy for the pensions industry. We’ve not only seen the issue of GMP equalisation coming to the forefront following the High Court ruling late last year, but with the Government consulting on pension consolidation and more recently giving the go ahead to CDC schemes, we are entering an exciting and potentially transformative time for the pensions sector.
“However, amongst all this uncertainty, our review highlights improved financial positions for schemes over the past 12 months, with an increasing number of companies taking a more proactive approach to their long-term pensions strategy and broadening their investment allocation. As pension schemes face an uncertain future and the prospect of undertaking a large and complex GMP equalisation project, it’s vital for schemes to conduct a full strategy review of their pension arrangements to ensure they not only manage their costs and risk, but also provide better outcomes and financial security for pension scheme members.”
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