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A slower recovery

The Pensions Regulator has recently published its 2015 Recovery Plan Analysis Report on annual funding statistics for UK defined benefit and hybrid schemes. In this article we provide an analysis of the report.

The Pensions Regulator has recently published its 2015 Recovery Plan Analysis Report on annual funding statistics for UK defined benefit and hybrid schemes. Data has been sourced from valuations and recovery plans submitted to The Pensions Regulator by schemes with surplus and deficit positions.

The report is based on Tranche 8 schemes which are those schemes with effective valuation dates between 22 September 2012 and 21 September 2013. These valuations fall within the third triennial cycle of the schemes. The report covers over 1,800 valuations with an effective valuation date for Tranche 8 and compares them to Tranche 5 which are those with effective valuation dates falling on and between 22 September 2009 and 21 September 2010.

Recovery plan

The average length of recovery plan for Tranche 8 schemes in deficit was 8.5 years, which is a slight increase from 8.4 years in the Tranche 5 period. End dates for Tranche 8 recovery plans also exceed those of Tranche 5 by 2.9 years on average.

The longer recovery plans tend to be associated with schemes of larger sizes by technical provisions, schemes with weaker covenant support or those with 40% or more of scheme assets invested in return-seeking assets. The increase in length of recovery plan for Tranche 8 may have been, amongst other factors, driven by larger deficits and/or constraints to sponsor affordability.

Deficit reduction contributions

The report shows that, in comparison to Tranche 5 schemes, schemes within Tranche 8 had larger deficits on average and received higher deficit reduction contributions.

Contingent security

Almost one fifth of Tranche 8 schemes have additional security in the form of one or more contingent assets which typically take the form of guarantees from a sponsor’s parent or associated entity. A small number of Tranche 8 schemes reported asset-backed funding arrangements.

Funding

The aggregate assets of Tranche 8 schemes are £290 billion and the average liabilities are £350 billion. The average ratio of assets to technical provisions remains unchanged from Tranche 5, although funding levels on the s.179 and buyout bases decreased compared to the corresponding ratios for Tranche 5.

Other statistics

  • With regards to discount rates, Tranche 8 schemes assumed a higher investment return over gilts compared to the average Tranche 5 scheme.
  • In terms of life expectancies, the average assumed life expectancy has increased for future male pensioners currently aged 45 and those currently aged 65. It is also noted in the report that a financial assumption which will have affected some Tranche 8 valuations is the use of the Consumer Price Index (CPI) inflation for pension increases where the Retail Price Index (RPI) was previously in use, as RPI has historically been higher than CPI.

The Pensions Regulator will publish its next Recovery Plan Analysis Report in 2016. 

Author: Amanda Lea

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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