More than two-thirds of DB schemes now have a long-term funding target according to Aon’s latest analysis of completed valuations this year.
This report found that of these schemes with funding targets, 71 per cent plan to achieve the target by the time the scheme is significantly mature.
The latest analysis also shows that the vast majority of schemes — 94 per cent — now hedge at least 70 per cent of their interest rate risk, and 93 per cent hedged at least 70 per cent of their inflation risk.
Aon says this is an an increase from three years ago. A more cautious approach in regards to hedging potentially reflects the issues some schemes had in the fall out from the ‘mini’ Budget in autumn 2022, under the Liz Truss administration.
The report also found that the average technical provisions funding level reached 103 per cent, with 65 per cent of schemes in surplus. Both these figures are he highest levels seen since 2005.
In addition, the average recovery period for schemes in deficit decreased to three years, down by 2.2 years compared to three years ago.
This analysis comes after The Pensions Regulator advised trustees to reassess their long-term targets, given the improved funding levels across the DB sector and and evolving endgame options.
In its report Aon says that this year’s analysis shows that the average funding level was over 100 per cent for the first time under the current funding regime. It says since the days of these completed valuation average funding levels have moved slightly higher, although there remains variation between scheme.
It says: “Against this background, the new funding regime will be in place very soon – for valuations with effective dates on or after 22September 2024 – with its focus on a journey plan towards a low dependency funding target, aiming to reduce reliance on the employer covenant and achieve low dependency as a scheme matures.
“Ahead of this becoming a legislative requirement, the majority of schemes have already set such a target – and many have also produced a journey plan setting out how to get there.”
Aon adds: “The incoming Labour government’s election manifesto indicated that it would adopt reforms for schemes to take advantage of consolidation and scale, and undertake a review of the pensions landscape to improve outcomes and increase investment in UK markets – which it launched on 20 July 2024. It remains to be seen whether the new government will take forward the DWP’s proposals on options for use of surplus and a public consolidator.
“The King’s speech set out the government’s intention to introduce a Pension Schemes Bill, which will include developments for consolidation through commercial superfunds.”
It says this full data-driven analysis aims to support Aon’s clients to make better decisions around endgame planning and strategic options going forward.