LONDON, (11 June 2019) - Aon, (NYSE:AON) a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that polling results from its Annual Pension Conferences, held this Spring, show that defined benefit pension schemes are beginning to grapple with the challenge of being fully funded or being on track to be fully funded.
With around 30% of schemes in a fully funded position on a technical provisions basis, and more on track to be so, Aon surveyed over 800 pension scheme managers, trustees and company pensions representatives on some of the key challenges they would face at this stage of their scheme's lifecycle.
Aon polled participants on what sponsoring employers should do regarding issuing dividends in the scenario where there is no Technical Provisions deficit. Over half of the respondents (55%) opted for partial dividends, where payments to shareholders are initially introduced more slowly, while 33% of respondents said that dividends should be allowed. Of the remainder, 8% thought that no dividends should be paid out until pension scheme benefits have been bought out.
Lynda Whitney, partner at Aon, said:
“Most trustees - even if they don’t have a say on this - recognise the need for companies to increase dividends to shareholders when the scheme funding position has improved - but they would prefer this to happen more gradually.
"The tension between contributions to the pension scheme and other uses of company capital becomes tougher when you are fully funded on technical provisions. Schemes could usefully continue to get similar contributions beyond the end of the recovery plan, to enable de-risking and a shorter period to get to their long-term funding target. But, companies are understandably resistant to paying these contributions, even though this means the scheme ends up retaining more risk."
In its latest Annual Funding Statement, the Pensions Regulator set out that UK pension schemes need to have a clear focus on long-term funding targets. Aon asked its conference delegates whether they see any changes to the technical provision basis over time, once fully funded. Only 16% thought that they should shift to their long-term funding target as their only measure and just 9% thought they would stick with their existing assumptions and show an ever-increasing surplus. The vast majority thought they would either gradually strengthen their technical provisions as they got closer to their long-term funding target (36%) or would select some other compromise position (39%).
Lynda Whitney said:
"Shifting immediately to the long-term target and saying you have a big deficit and no deficit contributions because you are fully funded on your old technical provisions basis, feels an uncomfortable message for a scheme to give to its members and the Pensions Regulator. Showing an ever-increasing surplus also has its drawbacks as pressure comes to spend that surplus, even though it is needed to get to the long-term target. Therefore, it is not surprising most schemes would want to manage the message even if it is less transparent."
When discussing what steps to take when a scheme has sufficient funds to meet the level of return required by its investment and funding strategy, results showed that the great majority (78%) of respondents would prefer to de-risk their growth portfolio, opting for a higher allocation with a lower target return. 17% of respondents indicated that they would look to reduce leverage in Liability Driven Investment (LDI) portfolios. Just 5% responded that surplus will be kept as cash used for pension payments or cash equivalent transfer values (CETVs).
Daniel Peters, partner at Aon said:
“Faced with this scenario, schemes have recognised the gradations of risk and considered reducing investment risk in their growth portfolio. This is consistent with a wider range of low risk strategies now available in the market, with a high degree of conviction in the level of return that can be achieved. However, it does need to be balanced against the cost of leverage in the LDI portfolio, to ensure that this is the most efficient structure."
Integrated Risk Management
Lynda Whitney said:
“From an Integrated Risk Management perspective, many of the difficult challenges around deficits are reducing, but new ones are emerging as we start to aim for the long-term funding target.
“A lot of thought goes into how to get a scheme fully funded on technical provisions, but it is equally important for trustees to spend time considering what happens when things have got better. We see that trustees typically want to take the next steps gradually - whether in reducing scheme investment risk or in considering how to manage their actuarial valuation assumptions.”
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