Laura McLaren, Partner & Head of DB Actuarial Consulting, said: “The Pensions Regulator’s annual funding statistics, covering the latest tranche of submissions in the period to 23 June 2023 for valuations between September 2020 to September 2021, makes for interesting reading against the background of a changing DB funding regime.
The statistics show 38.7% of all DB pension schemes in surplus, compared with just 27% the year before. For schemes in deficit, recovery plans are continuing to shorten – the average plan is around five years.
The numbers signal an important shift in funding levels and a trend we know will have accelerated into 2023 as government bond yields have increased materially and asset returns have been strong.
TPR estimates that 76% of schemes with valuations at 31 March 2023 are likely to be in surplus on an ongoing funding basis. Around a quarter of all DB schemes may have sufficient assets to buy out their liabilities with insurance companies; this figure is likely to rise sharply over the coming years.
These changes raise interesting questions as TPR looks to finalise its DB funding regime ahead of 1 April. It remains to be seen how the changes over the past 12 months bear on the regime that comes into force.
The latest data underscores that the world has changed significantly since the initial ideas for the revised DB funding code were set out in 2020, and TPR and DWP must take the time to make sure the final regulations and code are fit for purpose. It would be disappointing if the changes distract focus or disrupt well-planned scheme-specific approaches because they’re not flexible enough, or because they place a disproportionate compliance burden on schemes.”
Emily Goodrigde, Managing Director at Cardano, comments on TPR DB and hybrid funding statistics: "The improvement in schemes moving into surplus shown by the tranche 16 data provides an indication of the positive direction that the industry is moving, with this likely to be even higher now given the outcomes of the gilts crisis and increase in interest rates which has further improved funding for many schemes. While this is positive news for many in the industry, over half of tranche 16 schemes remain in a deficit, and the average recovery plan for those schemes is now sitting at 5.7 years. In fact, today’s update indicates that over a fifth of schemes have pushed their recovery plan end dates out further, by up to three years. So while the overall funding levels appear to be improving, there are still many employers that are struggling and seeking to extend their recovery plans, highlighting the continued importance of sponsor covenant.
"The statistics have also revealed a relatively high proportion of schemes have additional security by way of one or more contingent assets (15.4% of tranche 16 schemes). With two-thirds of these (9.6%) not recognised by the PPF in terms of their calculation of the risk-based levy, many schemes will need to consider tailored advice to factor these into their journey planning. In the current funding environment, the prevalence of contingent assets may grow further, as useful vehicles to prevent trapped surpluses.”
Kieran Mistry, Senior Business Development Manager at Standard Life, part of Phoenix Group said: “The latest figures from The Pension Regulator’s report highlights the strong funding position of many pension schemes. It’s clear that the shifts in market conditions over the past year plus sponsor contributions have come together to benefit the funding positions of many pension schemes. With 39% of schemes in surplus, this is a significant increase from last year’s figures, where 27% of schemes reported a surplus.
“This is a positive picture, and we are observing many schemes turning their attention to how they lock in their favourable positions and reduce risk. It has already been an extremely busy year for the bulk purchase annuity market, and we anticipate this trend will continue throughout the second half of 2023 resulting in a record-breaking year for transaction volumes. Our research also shows that the demand for buy-ins and buyouts is unlikely to slow down, with more than 86% of DB pension schemes expecting to approach an insurer in the next five years
Commenting on the data, Chris Rice, Head of Trustee Services at Broadstone said: "The data shows a further increase in the number of pension schemes in surplus alongside increases in funding levels for those not in surplus, compared to the data submitted last year.
With this improvement, which will have progressed further since the data was collected due to rising interest rates, focus of trustees and employers have turned away from deficit contributions and towards the end game – this largely being buy-out with an insurer.
The fervent activity in the bulk annuity market reflects the overall improved funding across the DB pension sector. As more and more schemes become fully funded buy-out will be the next target. Unless market conditions change significantly, demand for pension insurance will continue to increase.
The expected market congestion means schemes need to make themselves as attractive as possible when they approach the insurance market if they want to receive as many competitive quotes as they’d like. Schemes wanting to buy-out will need to be well prepared and able to work flexibly with their brokers and insurers to achieve their de-risking goals.”
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