In Depth: Pension scheme funding - an analysis of completed valuations
This In Depth sets out the approaches to and results of UK pension schemes' funding valuations completed up to July 2019.
The analysis sets out the positions of schemes at effective dates to June 2018, 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:
- A long-term funding target was used in addition to a technical provisions target by 60% of schemes, with 80% targeting self-sufficiency and 20% buyout
- Two-thirds of schemes took an integrated approach to risk management that included consideration of downside scenarios and contingency planning
- Around one half of schemes review their investment strategy at the same time as the valuation
- Average discount rates in excess of gilt yields were slightly higher overall than those used last year but slightly lower overall than those of three years ago – gilt yields had reduced significantly over the three-year period
- There was a significant increase in the number of schemes carrying out data cleaning exercises prior to the valuation
- The average technical provisions funding level was similar to both the previous year and three years ago – although, over three years, a typical deficit is likely to be higher in monetary terms, as both assets and liabilities have increased
- For schemes in deficit, the average recovery period, of 7.3 years, was similar to that under the previous triennial valuation
- One half of schemes allowed for an element of additional return in excess of the discount rate in their recovery plan
- Average funding levels have remained relatively stable over recent months
- The Regulator has signalled that all schemes currently undertaking a valuation should agree a long-term funding target, in advance of a more prescriptive and 'enforceable' revised Code of Practice on scheme funding
Our analysis covers 108 completed valuations carried out by Aon consultants for our clients, under the scheme specific funding regime, covering effective dates from September 2017 to June 2018. The data also include valuations carried out by Aon consultants with earlier effective dates.
- The context – the long-term funding target and use of integrated risk management
- The technical provisions – the discount rate, inflation, mortality, other demographic assumptions and the funding level
- The recovery plan – the recovery period, contingent security and the assumptions; and
- Looking ahead – to 2019 valuations and beyond
We divide valuations into categories based on their effective dates, to allow us to illustrate how features have changed. For this purpose, we have adopted the approach used by the Pensions Regulator, under which valuations are grouped into ‘tranches’.
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