Pension schemes and trustees will face difficult 2020 funding valuations, and should begin reviewing their options now, Aon has warned.

The firm stated that deficits for FTSE 350 company schemes have risen by an estimated £40bn in Q1 of 2020 so far, highlighting the impact of current volatility on pension scheme liabilities.

With as many as 15 per cent of schemes having an upcoming valuation data of 31 March 2020, or 6 April 2020, it emphasised that current volatility could lead to more difficult valuation negotiations.

The firm has urged trustees and sponsors to begin reviewing options now, to avoid placing additional pressure on UK plc “just when it does not need it”.

Aon partner, Lynda Whitney, stated: “There are plenty of levers that can be used within the legislative framework for valuations – but ultimately it’s a matter of sponsors and trustees having a grown-up conversation - preferably ahead of the end of March.

“Both sides should hold an ‘in principle’ discussion as soon as possible, which will allow them to agree to use levers they may have ruled out in the past.”

The levers highlighted by the firm include allowing for outperformance in the recovery plan, as a stop gap measure, and making use of the 15-month valuation timeline to formally take post-valuation experience into account, or to informally take account of any actual rebound in the assumptions.

Furthermore, it urged trustees to consider recovery plan structures that contain a step up in deficit contributions in recognition of “short-term affordability constraints”.

Whitney added: “This will be a really tricky round of valuations at a time when we do not know if the impact of current events on individual companies or the financial markets is short-term or long-term - and we are all trying to meet long term pension promises.”

However, the firm has also called upon the regulator to be "pragmatic" in its review of 2020 valuations.

Aon head of UK retirement policy, Matthew Arends, added: "Given the levels of volatility we are seeing in asset values, we call on The Pensions Regulator (TPR) to be pragmatic when reviewing 2020 valuations.

"In support of this, it also needs to be clear in the 2020 Annual Funding Statement that latitude is available within the funding regime and that it can be used by trustees and sponsors to reach reasonable valuation outcomes, and that pragmatic amendments to existing recovery plans are acceptable if the sponsor has short-term affordability constraints.

He continued: "These market conditions also challenge TPR's plans for a more heavily prescribed Fast Track approach to compliance, as appeared in its recent funding code consultation.

"If these circumstances were to repeat when the new funding regime is in place, TPR would need to step up to the challenge and be ready to flex Fast Track quickly enough to respond to the changing environment."

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