The funding positions of defined benefit (DB) pensions schemes have improved in general but there is variation between schemes and future funding challenges remains uncertain.
TPR estimates around a quarter of all DB schemes may have sufficient funds to buy out their liabilities with insurance companies. Trustees of those schemes will need to consider if their long-term targets remain appropriate, whether that is to buy out, or to examine other endgame options.
The majority of remaining schemes are estimated to have funding positions that are ahead of their funding plans. In these cases, trustees should consider whether the existing strategy and level of risk is in the best interests of members. If not, this may be a trigger for trustees to review their pace of funding and level of risk, or to re-order their long-term targets and set new, more ambitious objectives.
Funding levels will have fallen for a small number of schemes, including some invested in pooled funds and others unable to meet the necessary liability-driven investment (LDI) collateral calls when gilt yields spiked in 2022.
The AFS explains how they will need to reset funding and investment strategies to reach their long-term targets and should review their operational governance processes to ensure future resilience. Trustees, their investment managers and advisers should read TPR’s latest LDI guidance for more information. The level of risk that trustees decide to build into their scheme’s funding and investment strategies should be supportable by the employer.
Lou Davey, TPR’s interim Director of Regulatory Policy, Analysis and Advice, said: “For the first time in many years, our 2023 AFS highlights how most DB pension schemes are ahead of their funding target. Long-term targets, and associated funding and investment strategies set in an era of low interest rates, should be reviewed. Despite improved funding levels, uncertainty remains, and economic challenges persist and so schemes should not be complacent about covenant assessments.
“The level of risk that trustees decide to build into their scheme’s funding and investment strategies should align with the level of support the employer can provide.”
The current DB funding regime applies until new regulations and TPR’s revised DB code come into force in April 2024.
TPR’s analysis supporting the AFS will be published shortly.
TPR’s new Annual Funding Statement (AFS) 2023
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