Funding Triggers

Funding level triggers are typically designed to reduce a pension scheme’s allocation to return-seeking assets as the funding position improves and the scheme no longer needs to seek as much return. Over recent years the industry has seen an increase in the prevalence of such triggers, perhaps driven by the number of occasions on which schemes have missed opportunities to bank improvements in their funding position. However there are also other desires to de-risk, including maturing of schemes, peer pressure and the desire to have lower reliance on sponsor covenant (or reduce the risk to the company).

Funding level triggers are different to, and often in addition to, triggers related to interest rates and inflation, which are intended to capture circumstances when it is cost-effective to put hedging strategies in place. Aon Hewitt estimates around 10% of schemes now have funding level triggers in place – a figure that would have been under 1% only a few years ago. We have recently conducted a survey of 80 such schemes, asking questions about how they approach the issue in practice.

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