Third of pension schemes in surplus but have not agreed long-term targets

05 November 2018 4 min. read
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According to a new study, 37% of pension schemes are currently enjoying a funding surplus. At the same time, however, a similar number are yet to agree on a long-term target for their funds, suggesting they could be doing more to capitalise on their current momentum.

In recent years challenging market conditions and an ageing population have seen some schemes run increasingly large deficits. However, in 2018, reporting into the segment has found that most pension schemes are relatively well-positioned going forward, with the aggregate deficit for the FTSE 350 having notably fallen from £75 billion to £35 billion by the turn of the year. The sector has enjoyed further improvement in 2018, and currently hovers around the £10 billion mark.

The pension funds of 22 of the world’s largest countries have topped more than $41 trillion in asset value, buoyed by strong equity results. The US remains on top in terms of asset size, at more than $25 trillion, followed by the UK, as equities remain the dominant asset type, although alternative assets, such as private equity and property, have also enjoyed growth.

Now, a new survey from Mercer, one of the world’s largest pensions and actuarial consultancies, has shown that almost two in every five pensions schemes are presently holding a funding surplus. The 2018 Survey covered 180 schemes, with valuation dates between 1 January 2017 and 31 December 2017. Partially, this improvement in pensions funding may be because Mercer’s survey found that many pension schemes have changed their assumptions for life expectancy, with over half of schemes having carried out scheme specific analysis on life expectancy in the 2018 Valuation Survey compared to less than a third in 2015.

Third of pension schemes in surplus but have not agreed long-term targets

Planning in this regard can help pensions schemes allot their investments in a more balanced manner, risking smaller amounts of funding in the knowledge that due to rising life expectancies, they may be expected to pay out larger amounts to members. At the same time, the authors noted that one of the striking findings from the 2018 survey is the step-change in the number of schemes in surplus on funding assumptions.

Three years ago little more than one in four schemes were in surplus against their agreed funding target. Now almost two out of five schemes are in a surplus position, possibly improving their potential performance in the process. Of the majority that that have agreed to long-term investment strategies, there is a split between those looking towards buy-in or buy-out and those looking towards cashflow-driven strategies. 48% of those polled by Mercer favoured cash-flow driven strategies, while 38% favour buy-in or buy-out tactics instead.

Although many trustees tend to focus on longer-term targets, Mercer’s survey also highlighted that 38% of pension schemes have not agreed a long-term target, suggesting that they could do more to secure surpluses of their own. At the same time though, Simon Turner, a Director at Mercer, was keen to stress that this was not the only factor pensions schemes must take into account in the future.

“Now almost two out of five schemes are in a surplus position,” he explained,” However, having a surplus against a funding target is rarely the end of the journey. Trustees and sponsors need to set and agree longer-term objectives to improve the chances of paying members’ pensions as they fall due.”

According to its authors, the paper also illustrates how Integrated Risk Management (IRM) has become a key part of trustees’ decision-making processes. Three quarters of pension schemes are reviewing investment strategy alongside the valuation process, while a further two in three schemes are looking for external covenant analysis and twice as many receive daily updates of their funding position compared to 2015. 

Commenting on the increased use of IRM, Turner said, “It is clear trustees are looking at funding, investments and employer covenant together when undertaking actuarial valuations, and improvements have been made in risk management and regular monitoring. However, less than 20% of pension schemes have formally documented their approach to risk management which begs the question – are trustees really using the IRM framework to make practical decisions?  It is clear that there is considerable room for development in this area to aid robust and timely decision making.”