In Depth: Pension scheme funding - an analysis of completed valuations
- This edition of In Depth sets out the approaches to and results of UK pensions schemes' funding valuations completed up to July 2014. The analysis sets out the positions of schemes at effective dates to May 2013, and considers the assumptions adopted for assessing schemes' liabilities, and formulating recovery plans where schemes were found to be under-funded.
Our key findings this year are:
- In line with the step change identified last year, a majority of schemes are using a yield curve approach to value liabilities, rather than a 'flat' discount rate, including many smaller schemes.
- Average discount rates in excess of gilt yields increased pre-retirement but were little changed post-retirement.
- Trustees continued to adopt more prudent discount rates where they considered the employer's covenant to be weak, in line with the Regulator's encouragement to adopt an integrated approach.
- There was a significant increase in the proportion of schemes using a third party/specialist assessment of the employer covenant.
- Mortality assumptions continued to strengthen.
- Schemes continue to 'tidy up' their data to get a more accurate assessment of the funding position but also in anticipation of needing to enter into a transaction at some point.
- The average funding level was slightly higher than in the previous year.
- Recovery periods increased, on average, perhaps in response to the Regulator's new additional objective, to minimise any adverse impact on the sustainable growth of the employer.
- There was a clear correlation between the annual return allowed for in the recovery plan in excess of the discount rate and the length of the recovery period, with higher allowance for investment outperformance being made for longer recovery periods.
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Page last updated 26 August 2014
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