Improved funding levels for Tranche 7 schemes

The Pensions Regulator (TPR) has published its latest annual funding statistics for UK defined benefit and hybrid schemes, based on valuations submitted by Tranche 7 schemes (with effective valuation dates falling from 22 September 2011 to 21 September 2012 inclusive). 85% of these schemes had previously submitted valuations in respect of Tranche 4 (three years earlier) and Tranche 1 (six years earlier).

Relative to Tranche 4 schemes, TPR found that Tranche 7 schemes had an improved average funding level – 81% compared to 74%. The improvement reflected a median increase in assets of 41% compared to a median increase in technical provisions of 28%.

The increase in assets was mainly due to positive investment returns (especially in equity markets where the FTSE All-share total return index rose 68% between March 2009 and March 2012, for example) and sponsor contributions.

The increase in technical provisions is primarily due to lower discount rates. In particular, the average real single-equivalent discount rate reduced from 2.19% in Tranche 4 to 1.12% in Tranche 7. In addition, the average life expectancy for a male aged 45 has increased from 89.2 years in Tranche 4 to 89.9 years in Tranche 7, which has also added to the growth in technical provisions between tranches.

As a result of the improved funding levels, the mean recovery plan length has fallen from 9.7 years to 8.4 years between Tranche 4 and Tranche 7. As 3 years have elapsed, though, this means the average end dates of recovery plans have pushed outwards, by about 1.5 years.

Overall, the statistics provide a useful snapshot for employers to benchmark the progress of their own schemes around that point in time. Conditions have moved on since then, of course. In fact they will have improved further for many schemes, with good asset performance and a slight increase in gilt yields. Unfortunately, the figures are still likely to look worse than in early 2011, which is the appropriate reference date for scheme with a valuation due now.

Employers should take independent actuarial advice to ensure they are clear on their objectives for the scheme and work towards achieving these in their negotiations with the trustees.