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Many pension schemes are in funding surplus

Simon Turner
pension strategy

Mercer’s 2018 Valuation Survey shows a significant rise in the number of schemes in surplus on funding assumptions: 37 percent compared to 27 percent in the 2015 Survey. Simon Turner, Director – Mercer.

Integrated Risk Management (IRM) has become a key part of trustees’ decision-making processes. Life expectancy remains the great unknown risk for many pension schemes.

Nearly two out of five pension schemes are now in surplus against their agreed funding target, according to Mercer’s 2018 Valuation Survey. Although many trustees tend to focus on longer-term targets, Mercer’s survey highlights that 38 percent of pension schemes have not agreed a long-term target. Those that have agreed long-term investment strategies are split between those looking towards buy-in or buy-out and those looking towards cashflow-driven strategies.

One of the striking findings from the 2018 survey is the step-change in the number of schemes in surplus on funding assumptions,” said Simon Turner, Director at Mercer. “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.”

“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.”

The 2018 survey demonstrates 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; two in three schemes seek external covenant analysis and twice as many receive daily updates of their funding position compared to 2015.

Commenting on the increased use of IRM, Mr 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 percent 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.”

The survey found that many pension schemes have changed their assumptions for life expectancy citing more up to date information as the reason why. Over half of schemes had carried out scheme specific analysis on life expectancy in the 2018 Valuation Survey compared to less than a third in 2015.

Finally, the survey highlighted the continued trend for schemes closing to accrual of future pension benefits. Two-thirds of schemes covered by the 2018 survey were closed to accrual. Three years ago, nearly half of schemes were still open to new benefit accrual.


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