The Pensions Regulator (TPR) has urged pension scheme trustees to ensure that their long-term funding targets are still appropriate, after analysis in its 2023 Annual Funding Statement revealed that around a quarter of schemes could have sufficient funds for buyout.

TPR’s statement showed that most schemes have improved funding levels through a combination of investment out-performance from return-seeking assets and a significant rise in gilt yields, with many schemes expected to have exceeded buyout funding levels.

Given this, TPR emphasised that trustees will need to consider if their long-term targets remain appropriate, whether buyout is viable, or to examine other endgame options.

TPR also clarified that if funding levels have improved significantly, for example because of an unhedged position against interest rates, trustees should consider whether continuing with the existing strategy and level of risk is in the best financial interests of their members and beneficiaries.

If not, TPR suggested that they should look to apply some of the funding gains towards a less risky funding and investment strategy designed for a smoother and more predictable transition to the long-term target.

Improvements were not limited to closed schemes, as TPR noted that open schemes may have also seen a material reduction in the estimated cost of providing future service benefits and, given their immaturity, many have seen larger movements in funding levels.

Despite the recent funding improvements, TPR acknowledged that funding levels have fallen for a small number of schemes, including some schemes invested in pooled funds and others unable to meet liability driven investments (LDI) collateral calls when gilt yields spiked in 2022.
The Pensions Regulator (TPR) has emphasised the need for pension scheme trustees to ensure their long-term funding targets are still appropriate, after analysis for its Annual Funding Statement revealed that around a quarter of schemes could buyout.

TPR’s statement showed that most schemes have improved funding levels through a combination of investment out-performance from return-seeking assets and a significant rise in gilt yields, with many schemes expected to have exceeded buyout funding levels.

Given this, TPR emphasised that trustees will need to consider if their long-term targets remain appropriate, whether buyout is viable, or to examine other endgame options.

TPR also clarified that if funding levels have improved significantly, for example because of an unhedged position against interest rates, trustees should consider whether continuing with the existing strategy and level of risk is in the best financial interests of their members and beneficiaries.

If not, TPR suggested that they should look to apply some of the funding gains towards a less risky funding and investment strategy designed for a smoother and more predictable transition to the long-term target.

Improvements were not limited to closed schemes, as TPR noted that open schemes may have also seen a material reduction in the estimated cost of providing future service benefits and, given their immaturity, many have seen larger movements in funding levels.

Despite the recent funding improvements, TPR acknowledged that funding levels have fallen for a small number of schemes, including some schemes invested in pooled funds and others unable to meet liability driven investments (LDI) collateral calls when gilt yields spiked in 2022.

TPR provided specific guidance for these schemes, encouraging trustees who have seen a fall in funding levels to "reset" investment strategies to reach their long-term targets and review their operational governance processes to ensure future resilience.

TPR also stressed that the level of risk that trustees decide to build into their scheme’s funding and investment strategies should be supported by the support available from the employer covenant.

In particular, it suggested that trustees should consider obtaining independent specialist advice to help them, particularly where the covenant is complex or deteriorating, or if it has been materially affected by recent market events.

Commenting on the update, TPR interim director of regulatory policy, analysis and advice, Lou Davey, stated: "For the first time in many years, our 2023 AFS highlights how most DB pension schemes are ahead of their funding target.

"Long-term targets, and associated funding and investment strategies set in an era of low interest rates, should be reviewed.

"Despite improved funding levels, uncertainty remains, and economic challenges persist and so schemes should not be complacent about covenant assessments.

“The level of risk that trustees decide to build into their scheme’s funding and investment strategies should align with the level of support the employer can provide.”

TPR provided specific guidance for these schemes, encouraging trustees who have seen a fall in funding levels to "reset" investment strategies to reach their long-term targets and review their operational governance processes to ensure future resilience.

TPR also stressed that the level of risk that trustees decide to build into their scheme’s funding and investment strategies should be supported by the support available from the employer covenant.

In particular, it suggested that trustees should consider obtaining independent specialist advice to help them, particularly where the covenant is complex or deteriorating, or if it has been materially affected by recent market events.

Commenting on the update, TPR interim director of regulatory policy, analysis and advice, Lou Davey, stated: "For the first time in many years, our 2023 AFS highlights how most DB pension schemes are ahead of their funding target.

"Long-term targets, and associated funding and investment strategies set in an era of low interest rates, should be reviewed.

"Despite improved funding levels, uncertainty remains, and economic challenges persist and so schemes should not be complacent about covenant assessments.

“The level of risk that trustees decide to build into their scheme’s funding and investment strategies should align with the level of support the employer can provide.”

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