One in 5 DB schemes with 31 March 2020 valuations need to treble DRCs to meet RPs - TPR

Around 20 per cent of defined benefit (DB) schemes with 2020 valuations would have to more than treble their deficit recovery contributions (DRCs) to meet their current recovery plans (RP), assuming 31 March effective dates, according to The Pensions Regulator (TPR).

In its analysis on the potential impact on DRCs for tranche 15 valuations, assuming a 31 March 2020 valuation date, TPR found that fewer than 15 per cent of schemes would be able to retain their DRCs at the same level or reduce them to meet current RPs.

Its Annual Funding Statement Analysis 2020 also revealed that 40 per cent would need to increase their DRCs by between 0 and 100 per cent to meet their RP end dates.

Upon further analysis of those who would need to more than treble their DRCs, TPR found that some would need to increase their DRCs by “a much higher factor than three”.

However, it noted that many these schemes have shorter RPs than the average and a “relatively small increase” in the length of their RP would lead to a “much lower increase” in the level of DRCs needed.

The regulator’s modelling showed that if all tranche 15 schemes had 31 March 2020 valuation dates and were to maintain their RP end dates or meet their target within three years, the median increase in DRCs would be between 50 and 75 per cent.

TPR’s report continued: “Trustees would generally have expected their funding position to have improved over three years since their previous valuation, in accordance with their RP. However, given market movements over the period, it is likely that many schemes’ RPs will not be on track.

“In addition, the Covid-19 crisis may have impacted the extent to which employers can afford to make DRC payments. For some employers, affordability will have significantly reduced, at least in the short term.

“Therefore, we expect some trustees will need to make changes to their RP to reflect changes in their scheme’s funding level and changes in extent to which employers can afford to make DRC payments.”

The analysis found that the Covid-19 crisis had a “substantial and varied” impact on funding levels, and funding for many schemes was substantially lower at 31 March 2020 than 31 December 2019.

It estimated that the aggregate deficit of tranche 15 DB schemes as at 31 December 2019 would have reduced from three years prior due to better than expected asset returns, a reduction in expected inflation and updated assumptions for future mortality improvements.

However, it expected deficits to have increased since 31 December 2019.

“We estimate that the aggregate deficit of tranche 15 schemes as at 31 March 2020 would have increased significantly from three years ago,” the report stated.

“This is mainly due to financial market movements over the three months to 31 March 2020 - asset returns in most asset classes had fallen and real interest rates had also fallen further across much of the yield curve.”

Over the three-year period to 31 March 200, the average funding level of all UK pension schemes fell.

However, TPR noted that the experience of individual schemes varied “significantly”. Around 5 per cent of schemes saw funding levels fall by more than 15 per cent, while 5 per cent of schemes saw funding levels rise by more than 5 per cent over the three-year period.

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