mast image

Special Report

Impact investing


UK DB schemes target 83% buyout funding level

Related images

  • UK DB schemes target 83% buyout funding level

Related Categories

UK - The average target funding level for defined benefit (DB) schemes has increased from 69% to 83% of funds required for a buyout, according to latest research from Mercer.

Findings from the firm's 2009 SFO Valuations Survey suggested trustees are taking a more pro-active and in-depth approach to the statutory funding objective (SFO) following guidance from the Pensions Regulator (TPR) in June on the importance of "prudence" in calculating funding levels and technical provisions. (See earlier IPE article: TPR warns of need for 'prudence' in funding)

Mercer's survey of 257 schemes, with average assets of £149m (€169m), revealed trustees are monitoring the employer covenant more frequently, with 60% implementing a regular covenant monitoring regime of which 27% review it annually and 26% examine it more often.

But while the findings showed just over a quarter of respondents had commissioned an independent covenant review for their scheme, 2% of trustees did not plan to carry out any kind of covenant analysis.

The survey also highlighted a growing use of contingent assets and other forms of security, up from 17% to 24% in the last year, with a parent company guarantee proving the most common form of security for 88% of respondents.

Alison Pollock, principal at Mercer, said: "Recent company insolvencies have given the covenant a much higher profile. Both trustees and employers involved with the schemes in the survey commented on how the valuation process had helped them understand the importance of the covenant to the scheme's funding position."

Technical provisions used to set funding levels had been reassessed and agreed by 63% of schemes and their sponsoring employers, resulting in 50% of trustees aiming for a funding level of between 76-91% of the funds required for a buyout of the scheme through an insurer, pushing the average funding target up to 83% from 69% in 2008.

However Pollock, the author of the survey report, suggested the higher funding targets "may not so much be a sign of stronger targets as a reduction in the costs of buying out schemes' liabilities".

The study also highlighted an increase in the length of the average recovery plan submitted by the schemes to TPR, rising from 6.5 years in 2008 to 7.5 years, which Mercer said reflected the difficult financial conditions and the impact they have had on cash flow.

However while the average recovery plan is still below the 10-year trigger point set by TPR for reviewing the plans, it is around 50% longer than the statutory recovery period for DB schemes in the Netherlands, despite a temporary extension from three to five years in light of the financial crisis.

Figures from De Nederlandsche Bank (DNB) in July, showed 340 pension funds were required to submit recovery plans outlining how they would return to the minimum funding ratio of 105%, and while the DNB stated it will on average take schemes more than three years to reach the required target, "slightly more than 80 funds will need the full statutory period of five years".  (See earlier IPE article; DNB rejects 'small number' of recovery plans)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2540

    Asset class: All/Large Cap Equities.
    Asset region: UK.
    Size: The fund will be added to our guided fund range.
    Closing date: 2019-05-27.

  • QN-2541

    Asset class: Small/Mid-Cap Equities.
    Asset region: Switzerland.
    Size: CHF 130m.
    Closing date: 2019-06-04.

  • QN-2542

    Asset class: All/Large Cap Equities.
    Asset region: Switzerland.
    Size: CHF 130m.
    Closing date: 2019-06-04.

Begin Your Search Here