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Four out of five DB pension schemes expect to reach their long-term funding target within the next nine years, PwC survey finds

27 Jul 2022

  • 80% of the schemes surveyed already have a long-term funding plan in place 

  • 38% of schemes surveyed are explicitly targeting a buy-out level of funding, while two thirds (66%) have a long-term target that is equivalent to a buy-out level of funding

  • only 1% of the schemes surveyed are building a long-term plan around transferring to a superfund or consolidator

The majority (80%) of defined benefit pension schemes have already set a long-term funding target, according to a new survey from PwC. The Pensions Schemes Act 2021 will require all schemes to have a long-term plan in place to ensure that members’ pensions are paid in full. The results of this latest survey of 365 pension schemes suggests that many are already well prepared for these requirements.

80% of the schemes surveyed said they expect to reach their funding target in the next nine years. However, significant improvements in funding levels during 2022 mean timescales to reach long-term funding targets are now likely to be shorter for many pension schemes. 

The smallest schemes with assets of less than £300 million and the larger schemes with assets above £5 billion are the most confident - 85% believe they will reach the target within nine years, whereas only 75% of the medium size schemes expect to reach their target within this timescale.

Asset returns will be a key component of trustees and sponsors’ strategy to reach their long-term funding target, according to the survey. Two in five (41%) of the schemes surveyed plan to reach their long-term funding target using asset returns alone. Over 90% said that they would rely in whole or in part on assets returns. Less than one in ten (8%) have locked down all investment risks and are relying on sponsor contributions alone to reach their long-term funding target.  

For 50% of the schemes, there is no formal agreement in place with the scheme’s sponsor to ensure that the long-term funding target is reached, meaning if these schemes were to fall behind their funding target then the sponsor currently isn't required to pay extra funds into the scheme. While they may have agreed the target level of funding with the sponsor, these schemes have not made either the timescale or levels of additional funding a contractual requirement. Of the other 50% of schemes which have some form of agreement in place with their sponsors, one in three of the schemes (33%) have created a contractual obligation for the sponsor to fund the scheme to the long-term target but with the timeframe being flexible. And only 17% have made the long-term target an obligation that the sponsor will have to fund at an agreed point in time.

Commenting on the results of the survey, John Dunn, Head of Pensions Funding and Transformation at PwC, said:

“Our survey shows that members and the regulators of defined benefit pension schemes can take comfort that many trustee boards are already building robust long-term funding plans to help ensure pensions are paid in full. Only a minority of schemes - one in five - have yet to formulate a long-term funding plan, and these schemes may be waiting for the Pensions Regulator’s delayed new Code of Practice on defined benefit funding as their starting gun.

“One potential fly in the ointment is that there is currently not sufficient capacity in the insurance market to deliver schemes’ buy-out plans to fruition. If the results of our survey are replicated across all 5,000 plus defined benefit plans, we will need to see around £100 billion of insurance transactions a year for the next nine years. In contrast, the average annual volume of insurance transactions is currently around £30 billion. If capacity continues to be constrained at current levels, this could turn buy-out into a sellers market and the cost of insurance may rise. Those schemes that can get to market early - what we call being ‘trade ready’ - may avoid prices moving away from them.”

Laura Treece, pensions actuary at PwC, added:

“Pension scheme funding levels have improved dramatically over the last couple of years, with many schemes moving into a surplus position. This is likely to be helping sponsors and trustees feel more confident in reaching their long-term funding targets in the near future. Having the right investment strategy will be key to achieving this - we expect the trend towards more schemes relying on asset returns alone to reach their long-term targets to continue. How this strategy is implemented is important too, and we’re likely to see more use of fiduciary management and outsourced chief investment officers by schemes of all sizes.

“For many schemes, making sure sponsors are on board and committed to their long-term funding strategy will be an important next step. Sponsor buy-in will provide an additional layer of security and accountability. Having a clear plan that’s agreed between all stakeholders, as well as the right processes and resources in place, will help schemes stay on track to achieve their long-term goals.”

Ends

Notes to the editor

The survey is based on data collected during June 2022 and covers approximately 40% of all UK defined benefit pension schemes by asset value - the survey received responses from schemes with assets of around £600 billion in total. 

The survey covered pension schemes ranging in size from a few million to multi-billion pound schemes. The exact breakdown is below:

  • 44% from smaller schemes with assets of less than £300 million

  • 47% from mid-sized schemes; and

  • 9% from large schemes with assets of greater than £5 billion.

Overall 365 survey responses were collected.

 

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Alice Bowdery

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