Explaining how trustees and sponsors should respond, Laura McLaren, Partner, Hymans Robertson, says: “Our analysis shows an improving picture for this latest tranche of TPR scheme valuation submissions. However, it is important to note that it does not capture the effects that the recent COVID-19 pandemic will have had on scheme funding. 2020 valuations will inevitably be challenging for many schemes. With some companies and industries being hit harder than others, sponsor covenant and affordability will be particularly key. More variation is likely to be seen across the range of funding plans reported at subsequent dates.
“Nevertheless, TPR’s latest scheme funding analysis provides schemes with a good opportunity to benchmark their current funding plans. Indeed, with the DB funding regime under review, this data offers valuable insight into where TPR might ultimately set the parameters within the framework.
“With the first consultation drawing to a close, trustees and sponsors should be watching for more information on the exact form TPR’s new framework will take and testing how their funding plans will measure up. Developing a robust long-term funding plan will be a key requirement for schemes, and one that will require careful thought in the context of the turmoil caused by Covid-19. We’d encourage schemes to start preparing now.”
Key findings of the benchmarking analysis show:
• 63% of schemes were in deficit.
• The average funding level on a technical provisions basis was 93.4%, reducing to 84.1% for schemes in deficit. On average technical provisions were 74% of buy-out liabilities.
• 68% of recovery plan end dates were shortened or unchanged compared to the previous valuation. Around one in six (17%) schemes have extended their recovery plan end-date by up to three years (representing a recovery plan of a similar length in Tranche 13 relative to that agreed in Tranche 10), while 15% extended their recovery plan end-date by more than three years.
• This brought the average and median recovery plan lengths for tranche 13 schemes in deficit to 6.1 and 5.2 years respectively.
• 75% of schemes in covenant group 1 (strong) have recovery plans of less than 6.7 years, while the same proportion of schemes in covenant group 4 (weak) have recovery plans of up to around 12.2 years.
• 0.77% is the average single equivalent discount rate outperformance in excess of gilts.
• Average life expectancy improvements reduced between valuations. The median assumed life expectancy for a current male pensioner aged 65 is 87.2 years
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