Fully funded schemes face fresh challenges

Defined benefit pension trustees are divided on what the best way to manage schemes and tackle the challenges thrown up once they are fully funded, research from Aon has shown.

When asked on what sponsoring employers should do regarding issuing dividends, 55 per cent of responding scheme mangers, trustees and company representatives said that partial dividends, where payments to shareholders are initially introduced more slowly, was the best course of action.

However, 33 per cent said that full dividends should be allowed, while eight per cent said that no dividends would be paid out until pension scheme benefits have been bought out.

Aon partner, Lynda Whitney, said that most trustees “recognise the need for companies to increase dividends to shareholders when the scheme funding position has improved”, but that they would prefer it to happen “more gradually”.

She continued: “The tension between contributions to the pension scheme and other uses of company capital becomes tougher when you are fully funded on technical provisions.

Schemes could usefully continue to get similar contributions beyond the end of the recovery plan, to enable de-risking and a shorter period to get to their long-term funding target.”

Aon’s survey also asked whether delegates anticipated changes to the technical provision basis over time and once fully funded, with 36 per cent saying that they would gradually strengthen their technical provisions as they drew nearer to being fully funded.

Sixteen per cent thought they should shift to their long-term funding target as they only measure and just nine per cent believed that they would stick with their existing assumptions.

The remaining 39 per cent that they would select some other compromise position.

Whitney noted: "Shifting immediately to the long-term target and saying you have a big deficit and no deficit contributions because you are fully funded on your old technical provisions basis, feels an uncomfortable message for a scheme to give to its members and The Pensions Regulator.

“Showing an ever-increasing surplus also has its drawbacks as pressure comes to spend that surplus, even though it is needed to get to the long-term target.”

The vast majority (78 per cent) of those surveyed would prefer to de-risk their growth portfolio once fully funded, opting for a higher allocation with a lower target return.

Seventeen per cent would look to reduce leverage in liability driven investment (LDI) portfolios, while just five per cent said that surplus will be kept as cash and used for pension payments or cash equivalents transfer values.

Aon partner, Daniel Peters, added: “Faced with this scenario, schemes have recognised the gradations of risk and considered reducing investment risk in their growth portfolio.

“This is consistent with a wider range of low risk strategies now available in the market, with a high degree of conviction in the level of return that can be achieved. However, it does need to be balanced against the cost of leverage in the LDI portfolio, to ensure that this is the most efficient structure."

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