UK defined benefit pension schemes are still adjusting to the new funding regime a year after the introduction of the Funding Code, according to Aon.
The new regime was considered the biggest change in scheme funding since 2005. The first valuations have now been completed under the Code, giving schemes a clearer view of its impact.
Aon says covenant checks are now a key focus, with schemes that rely on funding from their sponsor needing to gather more information to demonstrate the strength of their covenant and how it supports scheme risks. Trustees must show how strong the employer is and use this to decide how much risk the scheme can take and how quickly it should aim to reach full funding.
Aon associate partner Emma Moore says: “Most UK pension schemes are simply much better funded these days compared to 2018, when the idea of the Funding Code was first raised. That can’t help but make you feel that the key reasons which drove the introduction of the Code are now much less relevant – but the baseline for funding standards has been raised both prior to and since its introduction last year.
“Over the last 12 months we’ve seen schemes’ experience broadly following the ‘80/20 rule’, with the large majority of schemes continuing their existing practices and showing that they are compliant with the Code. However, there is a minority for whom the new regime has meant more significant change. In particular, more poorly funded schemes are having to reconsider whether additional security is available to strengthen their position. Where this isn’t viable, there are some schemes where the addition of the Funding Code has done little to improve the situation.”
Aon partner Alex Beecraft says: “The new Funding Code and covenant guidance have brought the expected challenges for schemes, particularly where parent company guarantees are significant or covenant information is limited. The first-time adoption issues facing every scheme are different, but there is flexibility in the new regime and many stakeholders have been willing to be pragmatic when addressing them.
“The positive side of the new requirements is that they go further in requiring the integration of covenant with investment and actuarial aspects. As a growing number of flexibilities become available to deliver better outcomes for all stakeholders, explicitly recognising how covenant is the foundation of pensions strategy is central to capitalising on them.”
