80% of DB pension schemes have set long-term funding target

Eighty per cent of DB pension schemes have already set a long-term funding target, a new survey from PwC has revealed.

PwC said the survey results show that many schemes are already prepared for changes that the Pensions Schemes Act 2021 introduced - the requirement for all schemes to have a long-term plan in place.

PwC’s survey also found that 80 per cent of schemes said they expect to reach their funding target in the next nine years, however, the company warned that significant improvements in funding levels during 2022 mean timescales to reach long-term funding targets are now likely to be shorter for many pension schemes.

Additionally, the survey revealed that smaller schemes with assets of less than £300m and the larger schemes with assets above £5bn are the most confident, as 85 per cent of those surveyed believe they will reach the target within nine years, compared to 75 per cent of the medium size schemes.

Asset returns will be a key component of trustees' and sponsors’ strategy to reach their long-term funding target, according to the survey, as 41 per cent of responding schemes plan to reach their long-term funding target using asset returns alone.

The survey also found that over 90 per cent of the schemes surveyed said they would rely in whole or in part on asset returns and less than one in 10 (8 per cent) have locked down all investment risks and are relying on sponsor contributions alone to reach their long-term funding target.

For 50 per cent of the schemes surveyed, there is no formal agreement in place with the scheme’s sponsor to ensure that the long-term funding target is reached, meaning, according to PwC, if these schemes were to fall behind their funding target then the sponsor isn't currently required to pay extra funds into the scheme.

While they may have agreed on the target level of funding with the sponsor, these schemes have not made either the timescale or levels of additional funding a contractual requirement.

Of the other 50 per cent of schemes that have some form of agreement in place with their sponsor, 33 per cent have created a contractual obligation for the sponsor to fund the scheme to the long-term target but with the timeframe being flexible and only 17 per cent have made the long-term target an obligation that the sponsor will have to fund at an agreed point in time.

PwC head of pensions funding and transformation, John Dunn, commented: “Our survey shows that members and the regulators of DB pension schemes can take comfort that many trustee boards are already building robust long-term funding plans to help ensure pensions are paid in full.

“Only a minority of schemes - one in five - have yet to formulate a long-term funding plan, and these schemes may be waiting for The Pensions Regulator’s delayed new Code of Practice on defined benefit funding as their starting gun.

“One potential fly in the ointment is that there is currently not sufficient capacity in the insurance market to deliver schemes’ buy-out plans to fruition.

“If the results of our survey are replicated across all 5,000 plus defined benefit plans, we will need to see around £100bn of insurance transactions a year for the next nine years. In contrast, the average annual volume of insurance transactions is currently around £30bn.

“If capacity continues to be constrained at current levels, this could turn buy-out into a sellers market and the cost of insurance may rise. Those schemes that can get to market early - what we call being ‘trade ready’ - may avoid prices moving away from them.”

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