Most DB schemes now have a surplus
More than two-thirds of defined benefit schemes are now in surplus, according to the latest funding analysis by the regulator. More than two-thirds of defined benefit (DB) schemes in The Pensions Regulator’s (TPR) latest funding analysis are now in surplus, almost double the proportion recorded for the same cohort three years earlier. TPR’s latest Occupational DB scheme funding analysis found that 67 per cent of tranche 19 schemes reported a surplus, compared with 39 per cent for tranche 16, highlighting the significant improvement in scheme funding positions over the past three years.
The average recovery plan length has fallen to four years, compared to 5.7 years for tranche 16, while the median has reduced from five years to 3.2 years. The median recovery plan end date for tranche 19 schemes is now 2027.
The improvement in scheme funding positions is giving trustees of schemes of all sizes far greater choice over their long-term strategy, according to Broadstone executive director pensions, Nigel Jones. He noted that the reduction in both average and median recovery plan lengths suggested many trustees were now within much closer reach of full funding than they had been three years ago.
Nigel Jones warned schemes that remained in deficit against assuming that stronger funding meant the job was complete. For schemes still carrying a deficit, the priority should be to use that improved position carefully rather than simply assume the job is done, he said.
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The stronger funding environment comes as more defined benefit schemes consider a wider range of endgame options, including insurance transactions, run-on and alternative consolidation arrangements. Nigel Jones acknowledged that improved funding was giving trustees greater scope to plan proactively, although disciplined management would remain important as schemes approached their long-term targets.
Jon Forsyth, LCP partner and head of pensions development, commented that the latest analysis shows continued improvement in scheme funding positions. He noted that next year’s analysis will be the first in the new funding regime and will shed more light on how schemes are shaping up against those new requirements.
As schemes find themselves better funded, they will need to consider the growing number of endgame options, as well as the new surplus sharing regime coming in from April next year, which could offer the chance to share some of this improvement in funding between sponsors and members. With more schemes approaching their long-term targets, the focus will shift to converting progress into a secure endgame, requiring disciplined funding, investment, and covenant management.
Jon Forsyth’s comments highlight the importance of careful planning in the new funding regime. The regulator’s analysis provides a detailed picture of the current state of defined benefit schemes.
