Fully funded UK schemes face new challenges

Investment consultant Aon has produced polling results from its Annual Pension Conference, held last Spring, that show that defined benefit pension schemes are beginning to grapple with the challenge of being fully funded or being on track to be fully funded.

With around 30% of schemes in a fully funded position on a technical provisions basis, and more on track to be so, Aon surveyed more than 800 pension scheme managers, trustees and company pensions representatives on some of the key challenges they would face at this stage of their scheme’s lifecycle.

In its latest Annual Funding Statement, The Pensions Regulator set out that UK pension schemes need to have a clear focus on long-term funding targets. Aon asked its conference delegates whether they see any changes to the technical provision basis over time, once fully funded. Only 16% thought that they should shift to their long-term funding target as their only measure and just 9% thought they would stick with their existing assumptions and show an ever-increasing surplus. The vast majority thought they would either gradually strengthen their technical provisions as they got closer to their long-term funding target (36%) or would select some other compromise position (39%).

Lynda Whitney, partner at Aon, commented: “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.” She noted that 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. She added that “it is not surprising most schemes would want to manage the message even if it is less transparent.”

When discussing what steps to take when a scheme has sufficient funds to meet the level of return required by its investment and funding strategy, results showed that the great majority (78%) of respondents would prefer to de-risk their growth portfolio, opting for a higher allocation with a lower target return. Around 17% of respondents indicated that they would look to reduce leverage in Liability Driven Investment (LDI) portfolios. Just 5% responded that surplus will be kept as cash used for pension payments or cash equivalent transfer values.