Hard-hit DB valuations a sour note on three-year contribution gains
The actuarial valuations of at least a quarter of UK defined benefit (DB) pension schemes are likely to have been “badly impacted” by coronavirus-related disruption to markets, says Aon.
The firm's Risk Analyzer tool found a quarter of schemes' funding levels will have fallen by more than 6% since the start of the impact of the Covid-19 pandemic on markets. A 6% worsening of funding level corresponds to a deficit increase of £15 million for a typical pension scheme with a liability value of £250 million.
At the same time, a quarter of schemes are likely to have seen an improvement in their funding levels over the last three years, while half will have seen little to no change to an overall 6% worsening in funding levels since Spring 2017 valuations.
The figures come as part of a review of the movement in funding levels of 190 pension schemes since the 2017 valuation date. Despite recent negative impacts on valuations, Aon determined the recent market challenges have not notably characterised funding levels during the period.
Head of UK retirement policy Matthew Arends said: "In many cases, significant deficit contributions have been made over the last three years."
He added a warning on actuarial valuations with effective dates on 31 March or 5 April 2020 however, determining they "will be anything but repeats of 2017 valuations, given the impact that Covid-19 has had on pension scheme funding and sponsor covenants".
"On top of this, the degree of impact of Covid-19 on scheme sponsors has also been very mixed. Some sponsors have seen little impact so far, whereas others are badly affected, restricting the affordability of pension contributions," he added.
The priority for schemes moving into May should be to understand their specific circumstance outside of the statistics, Arends said.
"Of both the scheme itself and of the scheme sponsor…only then can they determine the appropriate actions for their particular scheme," he said.
This comes after The Pensions Regulator's (TPR) David Fairs told Professional Pensions that DB schemes had faced less of an overall negative impact from coronavirus-related market movements than the industry believed.
The regulator's executive director for regulatory policy, analysis and advice said many schemes' funding levels may not have dropped "quite as much as anticipated" due to good hedging strategies; Fairs also confirmed TPR is yet to see any large-scale failures where DB schemes have failed to deliver on their obligations.
Aon partner Daniel Peters said the global consultancy "continues to advocate high hedging levels" for DB schemes, but also adds schemes should review their cashflow requirements to ensure they continue to be robust in the coming months.
He said: "When schemes are looking at their investment policy in these exceptional circumstances, it is crucial that they establish that their investment risk is right-sized for the current situation.
"While the market environment has provided many challenges to investment strategies it is also generating meaningful opportunities."
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