UK-defined benefit (DB) pension schemes have been in their strongest position since 2005, with the average scheme 105 per cent funded and nearly two-thirds surplus, the highest levels since scheme-specific funding began, according to Aon’s latest In Depth analysis.
The findings, based on 136 valuations up to July 2025, show that rising funding is changing trustee and sponsor strategies, as schemes prepare for the new DB Funding Code and its low dependency funding requirements.
The research shows a near-even split in long-term targets, with 51 per cent of schemes choosing low dependency and 49 per cent buy-out. Most are close to their goals, with 78 per cent expecting to reach them within five years. Meanwhile, 54 per cent aim for buy-out, while 29 per cent plan to keep running on.
Trustees are also weighing other options, including consolidators, as the government moves to make surplus refunds easier, so run-on strategies become more attractive.
The analysis found 92 per cent of schemes now hedge at least 70 per cent of interest rate and inflation risks, up from around 85 per cent three years ago. Additionally, around three-quarters also used external experts to assess employer strength, in line with the Regulator’s focus on integrated risk management. Discount rates averaged gilts +0.43 per cent, slightly higher than last year but lower than earlier levels. Assumed life expectancy has also fallen, now 0.4 years shorter than three years ago.
More schemes are now in surplus, so recovery plans are less common. Only 35 per cent needed one, down from 58 per cent three years ago. Where recovery plans are still required, the average period has shortened to 3.9 years, almost two years shorter than in the previous cycle.
Although many schemes are in a strong position, 40 per cent have set up contingent security. At the same time, 80 per cent of these schemes are already in surplus, showing that trustees remain cautious about funding risks.
The next round of valuations will be the first under the new DB Funding Code and the 2024 regulations. These rules require schemes to set clear journey plans towards a low dependency funding basis, so reliance on employer covenants is reduced as schemes mature.
Aon associate partner Emma Moore says: “With the introduction of the new DB Funding Code and the requirement to set and agree a long-term objective for schemes, it will be interesting to see how the results of In Depth change in the coming years. Of schemes already adopting a long-term funding target, 51 per cent described this as ‘low dependency’ and 49 per cent described it as ‘buyout’. I will be keen to see how this evolves next year when we see the first valuations under the new code. We are certainly seeing more schemes describe their long-term strategy as some form of low dependency basis – or run-on – even where a buyout is heavily anticipated. This is partly to offer greater flexibility but also to avoid the potential accounting issues that might otherwise arise.
“Given the new Code requires schemes to show that their Technical Provisions converge to their low dependency funding basis over time, could this be the death of the split pre- and post-retirement discount rate? We are still seeing over 20 per cent of schemes using different pre- and post-retirement discount rates in their funding basis – but I do wonder whether we will see this fall close to zero as schemes navigate the requirements of the Code.”
