Pension funding levels show resilience but data management heading for ‘perfect storm’

There has been no long-term negative impact on the nation’s pensions funds from the 2022 LDI crisis, according to the latest Pensions Funding Survey from PwC, with DB funding levels stabilising after a period of uncertainty since September 2022.

The survey, which took responses from trustees and managers of £200 billion of defined benefit pension scheme assets in the months after the election of the Labour Government, shows that more than one quarter of schemes (26%) increased funding levels. With the majority, 71%, saying funding levels remained the same, this means only 3% of schemes saw a marked decline in funding levels.

In this period, around half of schemes (48%) saw the size of their asset base remain broadly the same with a further 40% seeing levels change by no more than 10%.

This stability is in stark contrast to 2022/23, when large increases in bond yields and significant declines in asset values led to 93% of surveyed schemes experiencing a fall in asset values. It should be noted however that in this period liabilities fell at an even faster rate, meaning underlying funding levels in general did improve. 

Gareth Henty, head of pensions at PwC UK comments: 

“The stress we saw in gilt markets in September 2022 severely tested the strength of funding in pensions schemes, but we can now see that this has not led to a longer-term impact on funding, with the vast majority, totalling 97%, of funds we spoke to seeing their funding level remain broadly unchanged or increasing.

“Schemes maturing, a greater focus on risk management and increasing regulation has resulted in the majority of UK pension schemes adopting relatively conservative investment strategies that, day-to-day, immunise them against market volatility. However, while stability clearly has its benefits, it also means that many pension schemes are not actively investing for growth to provide potentially better outcomes for their members.”

The survey also found that concerns are growing over data quality with 25% of survey respondents citing data preparation and third party administrator capacity as their number one concern.

Historically, the industry has worked on a ‘just in time’ basis where data would be checked just before a member retired, however the pensions industry is facing issues with schemes having their data ready for buy-out or risk transfer, along with getting data and systems ready for the introduction of pensions dashboards and completing Guaranteed Minimum Pension (GMP) equalisation exercises.

Gareth Henty adds:

“We’re seeing clear signs of a ‘perfect storm’ happening in the third party administration market and so it’s only right that the Pensions Regulator is increasing its level of engagement with administrators. Having accurate and timely administration is the bedrock for any strategy that trustees and employers want to pursue.   

“In addition, as trustees and sponsors will for the first time have to document their long-term objective in a Statement of Strategy, and as part of this due consideration should also be given to a scheme’s data strategy and the resource and capability needed to execute this over the period until the long-term funding objective is reached.”

The survey found that 82% of respondents have a long-term funding target in place, with two-thirds between 90-110% funded against this target. In addition, 40% of survey respondents expect to enter into a buy-out transaction with an insurer. This is an increase on last year's survey, which found 29% of reporting that they were targeting buy-out.  

More than half (58% of respondents) expect their scheme to use the Pensions Regulator’s Fast Track Statement of Strategy template. 

Katie Lightstone, Partner in Employer Covenant and Restructuring at PwC UK, says:

“Whilst some schemes and sponsors will want to target Fast Track, many schemes are focusing primarily on how best to achieve their long term strategy as funding levels have improved, before then considering how this fits with the new funding regime.

“As the first cohort of schemes get stuck into a valuation under the new process, it’s clear a highly integrated covenant, actuarial and investment approach is needed. Actuarial advisers will need covenant inputs at an early stage, and covenant advisers will equally need to understand scheme maturity and low dependency funding to do their work. 

“Corporates may wish to set out their view of key covenant metrics such as maximum affordable cash and covenant reliability periods as a starting position for trustees given the greater impact these metrics can have to journey plans (and hence cash contributions) in some situations.”