Over a quarter of tranche 15 schemes in surplus

Over a quarter (27 per cent) of defined benefit (DB) and hybrid schemes with an effective valuation date for tranche 15 were in surplus on a technical provisions (TP) basis, according to The Pensions Regulator (TPR).

The regulator’s Scheme Funding Analysis 2022 revealed that the average funding ratio for schemes in deficit and surplus was 88.8 per cent, with an average funding ratio of 108.4 per cent for schemes in surplus, and 82 per cent for schemes in deficit.

This represented "little to no change" on average compared to tranche 12, as assets and liabilities grew at approximately equal rates between tranche 12 and 15 for a majority of schemes.

Indeed, according to the update, scheme assets grew by 7 per cent, whereas TPs grew by 8 per cent, resulting in a median relative change in deficits for all schemes of 8 per cent, with around 46 per cent of all schemes experiencing a reduction in deficit over the inter-valuation period.

However, the regulator noted that the average ratio is generally higher for schemes that report liabilities in respect of active memberships, those with stronger covenants, without a contingent asset, or those that are more mature.

By 21 June 2022, TPR received over 1,710 valuations with effective valuation dates covered by tranche 15, which covers 22 September 2019 to 21 September 2020 inclusive, with 75.9 per cent of these schemes having previously submitted valuations in tranches 12, 9, 6 and 3.

Around one in six (16 per cent) schemes with valuations in both tranche 12 and tranche 15 reported a surplus of assets over liabilities in both tranches, while around 10 per cent moved into a position of surplus, and 7 per cent moved into deficit, from a surplus position in tranche 12.

In addition to this, more than two-thirds (67 per cent) of schemes with valuations in both tranche 12 and tranche 15 reported a shortfall of assets against liabilities in both tranches.

For just over seven out of ten (72 per cent) of these schemes, a reduction in the size of the deficit between tranches was associated with a shortened recovery plan period in tranche 15, relative to that agreed under the tranche 12 valuation.

However, given the three year inter-valuation period itself, TPR noted that a reduction in recovery plan length of less than three years between tranches still represents an extension to the date at which the scheme is anticipated to be fully funded.

It also found that just over half of schemes (55 per cent) have brought forward their recovery plan end dates or have left them broadly unchanged.

Additionally, nearly a quarter (24 per cent) of schemes have extended their recovery plan end date by up to three years, while a further 21 per cent have extended their recovery plan end date by more than three years.

Commenting on the latest figures, Hymans Robertson partner, Laura McLaren, stated: “Perhaps unsurprisingly, given the environment, more schemes (45 per cent) needed to lengthen their recovery plan end dates than the year before (35 per cent).

"As has been well reported, the impact wasn’t as severe as initially feared. Markets quickly reversed out the damage done by the pandemic, although challenges remained across many businesses.

"However, average recovery plan lengths are still continuing to fall with the average plans less than six years.

“Of course, the landscape has shifted dramatically in 2022. Whilst 27 per cent of schemes reported a surplus on the technical provisions funding basis at these valuations, in this year’s Annual Funding Statement the regulator estimated that 61 per cent of schemes currently doing valuations would be in surplus at 31 March 2022 as funding has improved.

"Subsequent hikes in gilts yields amidst rising inflation are likely to have brought further good news for schemes with less hedging in place – usually those with larger deficits that are further behind in their de-risking journeys. Overall, the scheme funding picture is likely to look much improved.

“With the DB funding regime under review, this evolving view of the DB universe makes for interesting consideration. Specifically, in terms of what all this could mean as TPR ultimately look to set the parameters within the framework when they publish their second consultation later this year.”

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