The actuarial valuations of a quarter of UK defined benefit pension schemes are likely to be “badly impacted” by the Covid-19 crisis, Aon has warned.

Following examination of the funding levels of 190 schemes, Aon predicted that a quarter of schemes’ funding levels were estimated to have fallen by more than 6 per cent over the past three years due to market conditions.

For a typical pension scheme with a liability value of £250m, a 6 per cent worsening of funding level would correspond to a £15m increase in deficit.

The company forecast that half of schemes would have seen anything from little or no change to a 6 per cent worsening in funding level, while the remaining quarter of schemes were seen as likely to have experienced an improvement in funding level over the period.

Aon head of UK retirement policy, Matthew Arends, said: "Actuarial valuations with effective dates on 31 March or 5 April 2020 will be anything but repeats of 2017 valuations, given the impact that Covid-19 has had on pension scheme funding and sponsor covenants. And this is despite, in many cases, significant deficit contributions having been made over the last three years.”

Arends commented that coronavirus’ impact on scheme sponsors had been “very mixed” so far, recommending that schemes’ priority should be “to understand their specific circumstances” in order to determine the appropriate course of action.

These actions could range from gaining clarity over the covenant strength of the scheme sponsor, to taking stock of the options available for recovery plans, or reviewing potential investment options.

"In terms of setting the deficit contribution levels following 2020 valuations and if affordability is a constraint, we recommend making use of all the flexibilities available in structuring recovery plans. This could mean allowing for post valuation experience (if there is a bounce back of asset values), longer and/or back-end loaded recovery plans or using alternative financing options, as required,” added Arends.

Aon partner, Daniel Peters, noted: "When schemes are looking at their investment policy in these exceptional circumstances, it is crucial that they establish that their investment risk is right-sized for the current situation. We continue to advocate high hedging levels but also recommend schemes to review their cashflow requirements to ensure they continue to be robust in the new environment.

“While the market environment has provided many challenges to investment strategies it is also generating meaningful opportunities. Schemes need to ensure that they have the right governance in place if they want to capitalise on these opportunities.”

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