Long-term funding survey results - Cause for comfort or concern?

Journeys can often have their obstacles, and planning the journey for long-term funding of your pension scheme is no different.

Earlier this year, we discussed how to reach a long-term funding target once it has been set and asked whether the new market solutions would help to smooth the ride. In this edition, we consider the results of the recent PwC long-term funding survey which covers over £Xbn of defined benefit pension schemes in the UK.

Key findings and self-reflection

1. 80% of schemes have a long-term funding target
   If your scheme(s) are in the minority and do not have a long-term funding target, why is that?
2. 2/3rds of schemes are either explicitly or implicitly targeting a level of funding that would allow the scheme to be bought-out with an insurer
   Changes in market conditions and positive asset performance can mean you get to a fully funded position sooner than expected. Should buy-out be your practical target or not? What is your plan to get your scheme “buy-out ready” if appropriate?
3. Half of schemes don’t have a contractual obligation to be fully funded on the long-term funding target
   Where you scheme(s) fall in this category, how do you intend to formalise the long-term funding target with your sponsor?
4. 80% of schemes expect to reach the long-term funding target within nine years
   There is currently a lack of capacity in the insurer market to allow for all of these schemes to be bought out over the next nine years. In a busy market, only those schemes that are “buy-out ready” will secure attractive terms. What will you do if your buyout timeline is delayed?
5. 90% of schemes rely on asset returns to reach the long-term funding target
   With schemes relying more on asset returns than contributions to improve their funding level, we are likely to see an increased use of fiduciary management and outsourced chief investment officers, by schemes of all sizes. How are you assessing the effectiveness of your investment strategy and the steps you can take to improve it?

The Department for Work and Pensions (DWP) is currently seeking feedback on their proposal for how the long-term funding and investment strategy requirements will operate. This is driving focus from tPR and other stakeholders.

From our survey; when participants were asked ‘What are your key concerns at the moment in connection with your pension scheme?’, the most common response was ‘Setting the right long-term strategy’. We would expect this to remain high on Trustee board agendas over the coming months. Preventing “travel disruption” to journey plans should also be on everyone’s radar.