Four out of five defined benefit (DB) pension schemes are expected to reach their long-term funding target within the next nine years, according to a PwC survey.
The majority (80%) of DB funds have already set a long-term funding target, the research has also disclosed.
The Pensions Schemes Act 2021 will require all UK schemes to have a long-term plan in place to ensure that members’ pensions are paid in full. The results of PwC’s latest survey suggest that many are already well prepared for these requirements.
The smallest schemes with assets of less than £300m (€352m) and the larger schemes with assets above £5bn are the most confident – 85% believe they will reach the target within nine years, whereas only 75% of the medium size schemes expect to reach their target within this timescale, PwC stated.
John Dunn, head of pensions funding and transformation at PwC, said: “Our survey shows that members and the regulators of defined benefit pension schemes can take comfort that many trustee boards are already building robust long-term funding plans to help ensure pensions are paid in full.
“Only a minority of schemes – one in five – have yet to formulate a long-term funding plan, and these schemes may be waiting for The Pensions Regulator’s delayed new Code of Practice on defined benefit funding as their starting gun.”
Asset returns will be a key component of trustees and sponsors’ strategy to reach their long-term funding target, the survey also showed. Two in five (41%) of the schemes surveyed plan to reach their long-term funding target using asset returns alone.
Over 90% said that they would rely in whole or in part on assets returns. Less than one in 10 (8%) have locked down all investment risks and are relying on sponsor contributions alone to reach their long-term funding target.
For 50% of the schemes, there is no formal agreement in place with the scheme’s sponsor to ensure that the long-term funding target is reached, meaning if these schemes were to fall behind their funding target then the sponsor currently isn’t required to pay extra funds into the scheme.
While they may have agreed the target level of funding with the sponsor, these schemes have not made either the timescale or levels of additional funding a contractual requirement.
Laura Treece, pensions actuary at PwC, said: “Pension scheme funding levels have improved dramatically over the last couple of years, with many schemes moving into a surplus position. This is likely to be helping sponsors and trustees feel more confident in reaching their long-term funding targets in the near future.”
She noted that having the right investment strategy will be key to achieving this. “We expect the trend towards more schemes relying on asset returns alone to reach their long-term targets to continue.”