Got Your Triennial Valuation This Year? Bad Luck.

(November 27, 2013) — Around 70% of UK pension funds with a triennial valuation in 2013 have seen their funding position worsen since their last valuation in 2010, according to data from PwC.

The auditing giant found this phenomenon was largely driven by government bond yields, which are used by most schemes as a basis to discount liabilities.

Relevant government bond yields fell from 4.6 % a year to 2.9% a year between April 6, 2010 and April 6, 2013.

Some 94% of schemes surveyed currently have a scheme funding deficit. As a result, more schemes are lengthening their recovery period to deal with increased deficits than in previous years. PwC found 68% of schemes have extended the time to reach full funding by three years or more.

In addition, 69% of schemes who have a higher deficit have increased their contributions to the pension fund, but PwC said evidence showed that putting more money into the pension pot was doing little to reduce the deficit in the long run.

This theory was also discussed recently by Pension Insurance Corporation and Fathom Consulting: they believed that government and central bank policies to protect householders’ debt levels has been at the expense of driving meaningful growth—leading ultimately to financial repression and corporates being forced to put more money into pension funds.

Earlier this year, the pensions regulator suggested schemes might consider extending the recovery period, increasing contributions and allowing for greater investment outperformance to structure their recovery plans.

However, the report found just 59% of recovery plans are based on the assumption that part of the deficit will be made good through additional investment outperformance, with an average allowance of 0.8% a year.

When asked if they had an integrated risk management plan that considered funding, investment, and sponsor covenant in place, around 43% of plans with more than £1.5 billion under management said yes, although another 50% said they were considering such a plan.

PwC also found that just 20% of UK pension funds were considering a buy-in or full buyout, and even fewer have the necessary tools to track their exact funding levels, making monitoring pension risk transfer triggers more difficult.

Only 11% of schemes have access to real-time funding results, PwC said, which meant buying opportunities were often missed.

A summary of the PwC report can be found here.

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