DB schemes urged to act quickly to ‘lock in’ recent funding gains

Defined benefit (DB) pension schemes should act quickly to ‘lock in’ recent gains in funding levels, according to Hymans Robertson.

The consultancy noted that DB funding levels had improved in 2022 due to “reasonably strong” growth asset returns and “significant” rises in yields.

Funding level improvements were highlighted yesterday (12 April) in the Pension Protection Fund’s 7800 Index, which showed that the DB pension funding ratio was at its highest level since June 2007.

However, Hymans Robertson warned that the continuing conflict in Ukraine was creating significant downside risk in financial markets going forward, which could lead to a higher risk of decreased funding levels in the future.

It urged corporates in the midst of triennial valuations to aim to finalise these valuations as soon as possible to try and lock in favourable contribution schedules.

Corporates were also encouraged to consider de-risking investment strategies and increase hedging to capitalise on recent funding gains.

This was particularly important if valuations packages were based on scheme funding remaining at the current levels, the consultancy noted.

“DB funding levels are holding up well at the moment,” commented Hymans Robertson head of corporate DB, Alistair Russell-Smith.

“Reasonably strong growth asset returns, and very significant increases in yields (both real and nominal yields are up more than 60bps since the start of the year), mean funding levels have improved in 2022.

“But the continuing Ukraine crisis means that there is a significant downside risk in financial markets going forward, potentially leading to an increased risk of funding level falls in the future.

“Corporates in the midst of a triennial valuation, for example with a 31 March 2021 or 31 December 2021 valuation date, should therefore look to finalise valuations as soon as they can and lock in favourable contribution schedules.

“Likewise, corporates should consider de-risking investment strategies, and increasing hedging to lock in recent funding gains, particularly if valuation packages are predicated on scheme funding staying at current levels.

“We would urge schemes to act quickly to ensure they lock in funding gains, before it’s too late.”

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