In Depth October 2013: Pension scheme funding - an analysis of completed valuations

This edition of In Depth sets out the approaches to and results of UK pension schemes’ funding valuations completed prior to August 2013. The analysis sets out the positions of schemes with valuation dates up to April 2012, and considers the assumptions adopted for assessing schemes’ liabilities and formulating recovery plans, where schemes are found to be under-funded.

Our key findings this year are:

• For the first time, a majority of schemes used a yield curve approach to value liabilities, rather than a ‘flat’ discount rate; this includes a majority of smaller schemes; 
• Changes to the average discount rates in excess of gilt yields varied, depending on whether schemes used the same margin pre and 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; 
• The proportion of schemes allowing for an inflation risk premium when setting inflation assumptions fell significantly; 
• Mortality assumptions continued to strengthen, leading to increases in liabilities; 
• Other demographic assumptions are now typically analysed alongside or in advance of the valuation, to determine how assumptions used at the previous valuation compare to the actual experience of members; 
• Schemes continue to ‘tidy up’ their member data to get a more accurate assessment of the funding position but also in anticipation of needing to enter into a transaction at some future time; 
• The average funding level was slightly lower than in the previous year; 
• For the first time, the majority of under-funded schemes obtained some form of additional employer security, including a significant proportion of smaller schemes; 
• The average recovery period was slightly shorter than last year, and almost three years shorter than the average recovery period agreed three years previously; there were very few recovery periods that exceeded ten years; and 
• There was a clear correlation between the length of the recovery period and the annual return allowed for in the recovery plan in excess of the discount rate, with lower allowance being made for shorter recovery periods.

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Page last updated 25 October 2013

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