Aon, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that the majority of pension scheme trustees still have work to do when it comes to defining their long-term funding target.
In its latest Annual Funding Statement, the Pensions Regulator expected UK pension schemes to have a clear focus on long-term funding targets, putting them on a de-risking journey as schemes mature.
For schemes to use the Regulator’s examples, they will need to consider their level of ‘maturity’ - a new dimension introduced in the Regulator's Statement this year. This is important as the Regulator is taking a tougher stance on more mature schemes that should be thinking harder about the long-term destination for their scheme.
Aon’s recent webinar ‘Long-term Funding Targets – interpreting TPR’s views’, focused on the results of the latest Annual Funding Statement from the Pensions Regulator. Polling of 146 participants during the session, showed that 61% of respondents estimated that their scheme was in the mature category, while 29% of respondents thought their scheme was immature.
As part of its work in this area, Aon has developed a maturity scale, which assesses schemes as being one of four categories:
- Very mature: typically schemes closed to new members, where pensioner liabilities exceed 75% and the duration of liabilities is less than 14 years.
- Mature: typically schemes closed to new members, with pensioner liabilities between 50% and 75% and the duration of liabilities between 14 and 19 years.
- Immature: typically schemes closed to new members, where pensioner liabilities are between 25% and 50%, and duration of liabilities is between 19 and 24 years.
- Very immature: typically schemes which are open to new members, with pensioner liabilities less than 25% and duration of liabilities exceeding 24 years.
Aon’s scale helps set the timetable for the Long-term Funding Target equation. This needs to balance Destination, Timeframe, Contributions and Target return, in conjunction with the risk that can be supported by the covenant.
Lynda Whitney, partner at Aon, said:
“Each scheme should set its own range for when they want to reach their long-term funding target. For the very mature category, we believe the Regulator would like those schemes to already be at their destinations but accept that many cannot immediately achieve this.
"For less mature schemes there may still be a justifiable expectation of reaching the long-term target very quickly if the employer’s covenant or other scheme-specific circumstances justify it. Generally though, a more gradual approach will be more appropriate.
Lynda Whitney continued:
“The polling results from our webinar, show that the vast majority of schemes are in the middle two maturity categories, so most still have time to reach their Long-term Funding Target. But this also means trustees and sponsors have work to do to define and then take steps to reach that target.
“We believe that alternative financing could be a useful tool to help bridge the gap between the technical provisions and the long-term funding target. This approach would help ensure that schemes have enough security, while allowing freedom to seek additional investment returns needed to get to the long-term funding target and potentially reducing the requirement for cash contributions from the employer.”