The Pensions Regulator (TPR) recently released its follow-up analysis to the 2021 Funding Statement. The analysis looks at the expected funding position of schemes with valuation dates between 22 September 2020 and 21 September 2021.
TPR's analysis confirms that on average schemes have seen substantial positive investment returns since their previous valuation. In particular, schemes invested in growth asset classes have benefited from the sharp improvement in markets following the vaccine announcements in late 2020.
Consequently, many schemes currently undergoing a valuation will report a significantly improved funding position compared to their valuation three years ago. For example, TPR estimates that half of all schemes with a valuation date of 31 March 2021 will have seen their funding level increase by at least 5% due to changes in market conditions alone.
Furthermore, the analysis suggests that the top 25% of schemes will have seen a 10% or more improvement in their funding level because of market condition changes. Any deficit reducing contributions that were paid over the inter valuation period will further serve to improve funding positions.
The average increase in funding levels due to market conditions over the 3 years to 31 March 2021
The proportion of schemes estimated to be in surplus as at 31 March 2021
The proportion of schemes in deficit at 31 March 2018 that are expected to be in surplus at 31 March 2021
Funding improvements – what should schemes be doing?
TPR’s analysis highlights that many pension schemes find themselves materially ahead of their previously agreed funding plans and/or in surplus. Trustees and sponsors in these situations need to consider what actions, if any, they should take in response to this development. For example, reducing risk within the investment strategy, reducing sponsor contributions, or even deciding to maintain the status quo.
"What separates the best run schemes from the rest is the existence of a clear, long-term strategy, with aligned contingency plans in place"
There is no single correct approach; what is right for your scheme will depend on many factors including your appetite for risk and the sponsoring employer’s situation. However, what separates the best run schemes from the rest is the existence of a clear, long-term strategy, with aligned contingency plans in place. Such schemes know what actions are right for them in advance of changes in circumstances. This ensures that opportunities are not missed, as well as minimising the amount of time and money that is spent reacting to unforeseen events.
The recent significant improvements in funding positions mean that more schemes can start to move on from short-term challenges posed by the pandemic and instead focus on their long-term plans. Our DB Navigator framework has been designed to help with all aspects of developing and monitoring a long-term strategy. Find out more about how you can benefit from having a journey plan to your endgame in place.
More support for pension professionals
If you would like to talk about this topic, please get in touch with your usual Barnett Waddingham contact to find out how we can support you.
In addition, we will be covering this issue in detail as part of our upcoming DB Pensions Conference Beyond: Making the future foreseeable which aims to help pension professionals consider future challenges and opportunities facing the industry. You can sign up to attend our conference here.Register today