LCP’s latest Chart Your Own course report reveals the results of their survey of the DB pension industry and analysis of scheme data. This highlights that the majority of schemes are seeing funding levels improving due to additional contributions and the impact of market conditions, including spiralling inflation and rising gilt yields. Improvements were most marked on a buy-out basis, with 20% of schemes seeing more than a 7.5% funding level improvement. This means that more schemes may find themselves at the buy-out funding point years ahead of their original target.
With an increasing number of schemes now potentially on an accelerated path towards their chosen end-state, LCP are warning schemes that they need to be nimble and responsive rather than focusing attention on routine regulatory requirements like valuations. This is especially true against this fast-changing background which means that a valuation may already be out-of-date by the time it is completed.
LCP’s report was built around their Strategic Journey Planning framework, which helps to achieve such an approach.
Other findings from the report were:
• GMP equalisation also featured as a high priority with more schemes now getting into the saddle on this issue. As well as regulation requiring it, for many schemes the process will feel timely given references to data, buy-out readiness and de-risking also featured highly in survey responses.
• Many schemes want the pace and volume of regulation to slow.?There’s a real risk that with so many new requirements, schemes opt for minimum compliance instead of embracing their spirit. LCP argue the right governance structure and prioritisation is therefore key. ?
• Buy-out remains the most favoured ultimate objective with more than 60% of respondents targeting this, over double the number targeting long-term run off.
• The survey showed that over 95% of respondents had at least discussed their journey plan as a trustee board, but only a third of schemes had both agreed their plan with the sponsor and formally documented it. LCP want to see this figure increase, noting the importance of sponsor engagement (the first step in their strategic journey planning framework).
• 30% felt that net zero wasn’t relevant to them despite increasing regulatory pressure to manage climate-related risks & opportunities.
• 20% said they saw Diversity, Equity and Inclusion issues as an extra governance burden, implying they are unlikely to act until they are formally required to do so. 43% were supportive but not yet acting, while 37% have taken specific steps to address this area for their schemes.
Mary Spencer, Partner at LCP and report author, commented: “The world of DB pensions is moving fast, with dramatic shifts in market conditions which can have profound implications for scheme strategy. Our survey shows that many schemes are still prioritising three-yearly valuations, which may well be out-of-date by the time they are completed, but we see a future where this process is largely redundant. Trustees who instead prioritise agreeing a clear long-term plan and keep it under constant watch as market conditions evolve will be best placed to deliver the best outcomes for members This is especially important as the economy gets buffeted by spiralling inflation and a cost of living crisis.
“This year’s results also show that the pensions industry is crying out for simplification, consistency and a slowing of the pace of new requirements, which we certainly sympathise with.”
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