Headline results from the survey are as follows:
Pension scheme funding levels are stable for the first time in a long time - almost all schemes (97%) in our survey have seen their funding level stay the same or increase in the previous 12 months
Data and administrator capacity is a key issue for schemes - a quarter (25%) of schemes surveyed reported this as their main issue. This is being driven by the upsurge in non-BAU activities
4 in 5 schemes have set a long-term target - given the focus of the new pensions regulatory regime is for trustees to document their long-term strategy it's not surprising to see that 82% of schemes have already set a long-term funding target
Transferring the pension scheme to an insurer is the most common end game objective - given the high and stable levels of funding we are continuing to see, it's no surprise that 40% of schemes in our survey have insurance ‘buy-out’ as their end game objective
Schemes set a high bar to return surplus to members or the sponsor - 67% of respondents told us their pension scheme would need to be fully funded to a buy-out level or above before they would consider sharing surplus with the members or the sponsor
Trustees see little value in the Statement of Strategy - 69% reported that the new Statement of Strategy would lead to little benefit for their members but Fast Track is a good fit - 58% of schemes expect to use the Pensions Regulator’s Fast Track Statement of Strategy template
The funding levels of the UK’s defined benefit pension schemes have been stable (71%) or have improved (26%) over the past year.
Most schemes have seen the size of their asset base remain broadly the same (48%) or changed by less than 10% (40%).
This stability is in stark contrast to 2022/23, which saw large increases in bond yields and asset values falling significantly. 93% of schemes in our 2023 survey experienced a fall in asset value (but liabilities falling at a faster rate leading to improved funding levels).
The UK’s defined benefit pension schemes also remain very well funded. The PwC Buyout Index1 has shown a surplus for each of the last 25 months.
[1] The PwC Buyout Index tracks the funding position of the whole universe of just under 5,000 UK corporate defined benefit pension schemes on a basis reflecting PwC’s view of insurance market pricing.
Member data is at the heart of a pension scheme; pensions can’t be paid without high qualify member data.
Historically, the industry has worked on a ‘just in time’ basis; data would be checked just before a member retired. Just-in-time works for business as usual and if there are no other pressures on administrators.
A perfect storm is besetting the pensions industry, caused by: an upsurge in schemes needing to have their data insurer ready; schemes completing GMP equalisation exercises; getting ‘dashboard ready’; plus insurers taking up third party capacity as their businesses grow - all on top of BAU activities.
PwC is helping schemes resolve their data issues - information on the services we provide is available on the PwC as your data specialist page.
Most schemes (82%) have a long-term funding target in place. However, almost 1 in 5 schemes (18%) are yet to set a long-term funding target. The new Statement of Strategy (required for funding valuation dates on or after 22 September 2024) will require schemes to document a long-term funding objective. Therefore, now is the ideal time for all trustees and sponsors to consider (or re-assess) their long-term funding targets.
As expected, a significant proportion (40%) of schemes are explicitly targeting buying-out in the long-term. Another 22% are implicitly targeting buy-out or a higher asset value; gilts plus 0% or gilts plus 0.25% are similar to targeting buy-out.
Aside from having sufficient assets to buy-out liabilities, schemes will also need to work to ensure that they are ready to transact with an insurer, e.g. resolving data issues and documentation.
The most common gilts plus measure is gilts plus 0.5%, reflecting the UK Pensions Regulator’s Fast Track requirement for a low reliance funding target.
The average scheme in our survey is just under 100% funded relative to its long-term funding target. The most common long-term funding target is buy-out or other measures of funding that are broadly equivalent to buy-out.
This reflects what we see in the wider market - schemes are well funded relative to the cost of buying-out with an insurer. The PwC Buyout Index currently estimates that UK DB schemes in aggregate are around 120% funded on a buy-out basis.
While there may be some differences between respondents’ schemes and the average scheme and some timing differences; some of this difference may reflect an overestimate of the cost of buy-out.
Under the current legal framework, the trustees of a defined benefit pension scheme can, if certain conditions are met, return surplus above a buy-out level of funding to the sponsor.
As part of its recent initiatives to encourage pension schemes to invest a greater proportion of their assets in the UK, the Government has considered giving sponsors and scheme members easier access to surpluses.
A key component of any ‘surplus extraction’ regime would be the level above which surplus could be paid out of the scheme.
The SoS is the key document that trustees and sponsors will need to agree as part of their next valuation.
More than half of the respondents to our survey told us that they intend to formally document their long-term strategy as being to buy-out their scheme with an insurer.
FastTrack has three tests that schemes will need to pass, being: the strength of the technical provisions; how the funding level behaves under stress; and recovery plan length.
Many schemes have already reached their end-game level of funding. In this changed environment, we find that pension scheme trustees and sponsors are more concerned about issues such as data and insurance market capacity than endgame planning.
We received responses from schemes with assets under management totalling around £200 billion.
Additional information on the schemes that responded to our survey are shown in the charts below.
Notes about survey
This document has been prepared only for the purpose of facilitating a general discussion on the topics and issues highlighted – it should not be regarded as advice or indicating a course of action. We accept no liability (including for negligence) to anyone else in connection with this document, and it may not be provided to anyone else.