Aon has published a report under its In Depth series, Pension scheme funding – an analysis of completed valuations, showing that 67% of surveyed UK pension funds used a long-term funding target in addition to a technical provisions target during their latest valuations.

Of those schemes, 74% had a journey plan to achieve the target by the time the scheme was significantly mature, the study also found.

The analysis sets out the positions of schemes at effective dates to July 2019, and considers the assumptions adopted for assessing schemes’ liabilities, and formulating recovery plans where schemes were found to be underfunded.

The March 2018 Department for Work & Pensions white paper on Protecting defined benefit pension schemes proposed that a revised Code of Practice should include a description of how trustees and sponsoring employers should set their statutory funding objective – their technical provisions – in the context of their long-term objective (LTO).

Two years later, in March 2020, The Pensions Regulator (TPR) published the first of two planned consultations on its proposals for a revised code.

The LTO principle, Aon said, is key to the revised code and introduces for the first time an explicit requirement that schemes look to the long term: “By the time they are significantly mature, the regulator expects schemes to have a low level of dependency on the employer and be invested with high resilience to risk.”

TPR has proposed that a scheme be considered ‘significantly mature’ upon its duration reducing to somewhere in the range of 14 to 12 years.

It defines ‘duration’ to be the mean term of the liabilities weighted by the value of the scheme’s future cashflows; in less technical terms, it might be considered the number of years until the ‘average’ payment date of the scheme’s benefit outgo.

Aon said the rationale for introducing such a principle now is the maturing of the typical DB pension scheme.

The Pension Schemes Bill – which is currently going through parliament – will require schemes to set a strategy for ensuring that benefits can be provided over the long term, the firm added.

In its consultation, TPR cites this as a requirement for trustees to set an LTO for their scheme with regards to the desired funding target – the long-term funding target (LTFT) – the time taken to get there and the investments a scheme will hold.

In its 2020 annual funding statement, TPR said schemes with LTFTs already in place should be able to continue to focus on these targets with suitable short-term modifications and encouraged other schemes to set a LTFT.

Although a revised code will not be in force until December 2021, based on the regulator’s current timescales, Aon’s findings show that trustees and employers understand the importance of setting an LTO, and that they are anticipating the likely changes to the funding regime.

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