In addition, reaching full funding against the existing funding target will not be the end of the story for most schemes, Aon argues. The recent publication of the DWP’s consultant on long-term funding and investment strategy increase the focus on the long-term funding target and the journey plan, to reduce reliance on the employer covenant and achieve ‘low dependency’ as a scheme matures.
This will typically require a lower risk investment strategy and a higher funding target once a scheme is ‘significantly mature’. Ahead of this becoming a legislative requirement, the majority of schemes have already set such a target along with a journey plan to get there, in line with regulatory guidance.
Key Findings
This In Depth sets out the approaches to and results of UK pension schemes’ funding valuations completed up to July 2022. This is the sixteenth year in which we have produced a detailed analysis, and our key findings this year are:
• A long-term funding target was used in addition to a technical provisions target by 70% of schemes, and 59% of those schemes had a journey plan to achieve the target by the time the scheme is significantly mature;
• 76% of schemes took an integrated approach to risk management that included consideration of downside scenarios and contingency planning;
• 77% of schemes used a third party/specialist assessment of the employer covenant;
• 86% of schemes hedged at least 70% of their interest rate risk and 88% hedged at least 70% of their inflation risk, compared to 58% and 61% three years ago;
• Average discount rates in excess of gilt yields were similar to those used last year but lower than those of three years ago;
• The average difference between RPI and CPI assumptions was 0.84% p.a. for the period before 2030 and 0.09% p.a. post-2030, reflecting the announced change to the calculation of RPI from 2030;
• 55% of schemes carried out an analysis of experience in respect of demographic assumptions other than mortality;
• 54% of schemes either carried out a data cleaning exercise prior to the valuation or planned to carry out a data cleaning exercise;
• The average technical provisions funding level – 93% – and the proportion of schemes in surplus – 46% – were both higher than for any previous year since the start of the current funding regime in 2005;
• For schemes in deficit, the average recovery period, of 6.1 years, was 1.2 years shorter than three years ago, when many schemes’ previous valuations were undertaken; the percentage of schemes requiring a recovery plan fell from 68% to 54%;
• An element of additional return in excess of the discount rate was allowed for in 65% of recovery plans; and • Since the dates of these valuations, average funding levels generally improved further.
We comment on possible explanations for our findings, and look ahead to 2022 valuations and beyond.
Full Pensions Funding Report
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