Funding level and schemes in surplus at 17 year high

The proportion of defined benefit (DB) pension schemes in surplus and the average technical provisions funding level were at their highest level since the start of the current funding regime as of July 2022, analysis from Aon has revealed.

The report, Pension scheme funding – an analysis of completed valuations, showed that the average technical provisions funding level for tranche 16 schemes was 93 per cent and the proportion of schemes in surplus was 46 per cent, the highest levels since 2005.

Aon also pointed out that the change over the typical valuation cycle, from tranche 13 to tranche 16, represented an “improvement” in the average funding level and an increase in the percentage of schemes in surplus.

However, Aon clarified that both assets and liabilities are likely to have increased "significantly" over this period, meaning that a typical scheme's deficit in monetary terms would not have reduced to the same extent that might be suggested by the change in funding levels.

The report also revealed that, at the date of valuation, 81 per cent of tranche 16 schemes for which a best estimate of liabilities was produced were funded at around or above 100 per cent on that basis.

Where a precise best estimate valuation of liabilities was available, the average funding level on this basis was 102 per cent, according to the report, compared to the 87 per cent on the technical provisions basis for the same schemes.

It also found that 54 per cent of tranche 16 valuations required a recovery plan, compared to 68 per cent of valuations in tranche 13.

The average recovery period for tranche 16 valuations in deficit was 6.1 years, representing a fall of 1.2 years when compared to the 7.3 years recovery period for tranche 13 valuations.

The report also detailed the length of recovery period by employee covenant and showed that, for tranche 16 valuations where the trustees believed that the employer covenant was “weak” or “tending to be weak”, the average recover period was longer at 8.5 years.

However, where the trustees believed the employer covenant was “strong” or “tending to strong”, the average was 4.9 years, representing a difference of 3.6 years.

Aon pointed out that this is a “significant but smaller difference” than that for tranche 13, when many tranche 16 schemes’ previous valuations were undertaken, for which the averages were 10.7 years and 6.0 years respectively, representing a difference of 4.7 years.

Additionally, the report provided insight into schemes’ long-term funding targets, revealing that 31 per cent of tranche 16 schemes expect to reach their funding target within five years and 47 per cent expect to reach their target between five and 10 years.

The report also found that 20 per cent of tranche 16 schemes had already reached their long-term funding target, representing an 11 per cent increase on the 9 per cent of tranche 15 schemes.

Alongside this, Aon detailed the preferred methods of schemes to reach their long-term funding target, with asset outperformance proving the most popular, as the intended means of 91 per cent of schemes.

Increasing maturity making the target easier to reach, additional contributions beyond the agreed funding plan, and liability management were also favoured means of reaching the target, being mentioned by 76 per cent, 35 per cent, and 30 per cent of schemes respectively.

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