Jill Ampleford Partner

84% of the schemes in our survey have a long-term target and are working towards it. It is pleasing to see that this figure is up from the 75% based on our 2020 survey, with schemes smaller than £1bn seeing the largest increase as shown in the chart opposite. However, some 15% of schemes are yet to set up this framework, and indeed will need to for their first valuation under the Pensions Regulator’s new funding framework – expected to be in force in 2023.

Percentage of schemes with a long-term funding target

Expected timescale to reach long-term target

Schemes are all at different parts of their journey and have different challenges to address in today’s landscape. For example, the 29% of schemes in our survey who are on track to reach their long-term funding target within five years will have different priorities to the 32% who expect to have to wait more than 10 years to get there.

As well as having a clear idea of when you expect to get to your long-term funding target, it's also important to understand the sensitivity around that date. For example, favourable member experience or changes in financial conditions (including the costs of insurance, if that’s relevant for you) will accelerate your journey – but it's important to know by how much. It is also important to consider how might your actions change if your journey is accelerated. Scenario analysis can give a better understanding of the sensitivities for your scheme.

Based on our survey responses, those schemes whose long-term target is buyout are typically targeting to reach their end game sooner than those where the long-term target is long-term run off.

Our survey data reveals that although buy-out and long-term run off remain the most popular long-term targets, there is a contingent of schemes targeting other goals.

In our data, the proportion of schemes targeting different long-term funding targets remains fairly consistent regardless of covenant rating.

Perhaps some of the respondents who are targeting “other” are looking to achieve one of the new end game solutions which are hitting the pensions market. The right end game solution depends on a number of factors, with one important factor being covenant strength (now and in the long-term), and which risks you want to have eliminated by that stage.

Long-term funding target by covenant rating

In the table below, the colours indicate the extent to which certain risks have been removed (with red meaning risks may remain, and green indicating a largely risk-free position).

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The right option for your scheme will depend on your circumstances – looking through a lens of integrated risk management.

The short and long-term covenant strength of your sponsor is particularly important in deciding what end game is right for your scheme.

But another factor perhaps less fully considered in the past is the influence of climate risk. Analysis of potential climate risk scenarios can inform your decision about which long-term target is most appropriate for you, based on timeframe to reach the target as well as climate risk exposure within each of the solutions. The regime in which each solution operates may have a bearing on future climate risk exposure, for example the insurance regime (under Solvency II) is expected to provide significant climate protection. Under a run-off approach, your long-term climate risk exposure will depend on the climate-sensitivity of the scheme’s assets and actions taken by the sponsor.

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