The ultimate goal of a defined benefit scheme is clear – to ensure that all members receive the benefits they have built up in the scheme. For most schemes, this will involve some form of insured solution at a point in the future where remaining benefits are secured and the scheme is then wound-up. For some that will come sooner; for others it is currently a very distant prospect.
The UK funding regime has historically “ignored” this ultimate end point – rather, we have the somewhat vague construct of technical provisions (ongoing funding basis). This is the liability target required in funding valuations which must be prudent, but need not remove all future risks. Typically, you might see this liability target sitting in the region of 60-80% of the cost of insuring scheme benefits. Therefore, even if a scheme is 100% funded on the technical provisions basis, it will not be able to insure the benefits without significant further investment returns or significant further contributions from the sponsor.
As most of us working in defined benefit pension schemes already know, a scheme’s technical provisions are only a stepping stone towards the ultimate goal. What happens once full funding on an ongoing basis is achieved?
Over recent years, to assist scheme trustees with forward planning, the Pensions Regulator has introduced the concept of the long-term funding target (LTFT). The LTFT is defined as “the level of funding the scheme will need to achieve in order to reduce its dependence on the employer”. To me, this translates as meaning the buyout level funding or a level of funding that can be managed towards buyout without material further contributions from the sponsor.
The LTFT is now a key part of valuation discussions for 2019 and beyond. This is particularly the case for rapidly maturing schemes where the journey time to end point is getting shorter and shorter. The LTFT need not (and in most cases will not) bring about a change to the ongoing funding target or any immediate changes to the investment strategy. What it should do is bring about discussions on journey planning (both in the short and long-term), managing and reducing risk over time and possibly setting triggers that will reduce risk as the funding level improves and/or as the scheme matures.
Yields are returning to very low levels resulting in higher and higher liability values. As such, the funding challenges for pension scheme trustees show no sign of getting any easier. However, I am confident that looking to the future and setting clearly defined long-term targets (and clearly planning for how they will be achieved) will serve trustees well over the years ahead.
Spence & Partners latest blog for Pensions Expert:
Back in the day, actuarial valuation results contained an element of surprise. The actuary would be sent the data, it would be processed, the numbers would be crunched and many months later, the results would appear.
There was often limited fore-knowledge among the recipients, be that trustees or the sponsoring employers, about what the results would show.
An actuarial valuation was a lengthy, time-consuming process, which is one of the main reasons why a valuation was only deemed necessary once every three years, and why the timescale for completion was set at 12 months and later extended to 15 months. Read more »
Spence & Partners, the UK pensions actuaries and administration specialists, today commented on The Pensions Regulator’s (TPR) annual defined benefit funding statement 2015.
Alan Collins, Head of Trustee Advisory Services at Spence & Partners, said: “The regulator’s funding statement is now a firm fixture in the pensions calendar and this year’s instalment has given trustees, sponsoring employers and advisors plenty of food for thought. It is also clear that 2015 valuations will contain more bad news than good. The regulator’s own analysis shows that ‘despite all major asset classes having performed well and schemes having paid £44 billion in deficit repair contributions over the last 3 years…many schemes with 2015 valuations will have larger funding deficits’ and that ‘most schemes will set funding strategies based on lower expected returns than at their last valuation’. Read more »
Spence & Partners latest blog for Pension Funds Online –
The number of firms offering daily valuation tools has risen significantly in the last 12 months and many pension scheme trustees now have access to real time updates of their funding position.
This is a step change from the days when accurate figures were available once every three years, fifteen months after the effective valuation date, with an approximate roll forward provided once a year between valuations.
Whilst each consultancy firm extols the particular virtues of their system, is it time to take a step back and ask whether trustees are actually getting the most they can out of their spend on these tools? Read more »
This blog was written for Pension Funds Online by Marian Elliott of Spence & Partners –
There is a lot to look forward to at this time of year. The end of March will bring longer daylight hours, the promise of slightly warmer temperatures and, for many trustee boards and companies, the process of carrying out an actuarial valuation of their pension scheme will begin.
If the very mention of this sends shivers down your spine then read on. Whilst there are no magic potions which can shrink your deficit or take the sting out of the valuation exercise, there are actions which you can take to improve the way in which the valuation process is managed and deliver better results for both the company and trustees: Read more »