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Pension funding under the microscope

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Research has revealed that some 30 per cent of pension schemes are prepared to set funding targets below the ‘trigger’ levels set out by the Pensions Regulator under the Statutory Funding Objective (SFO) regime.

Mercer Human Resource Consulting’s SFO valuations survey studied 230 UK pension schemes across a variety of industry sectors and analysed the policies being adopted since the introduction of the regime in December 2005.

The SFO requires trustees to set scheme-specific funding targets. While no specific rules have been set regarding the appropriate level of target, the Pensions Regulator has hinted at preferences by setting ‘trigger points’, below which schemes’ approaches may be subject to additional investigation.

Tim Keogh, worldwide partner at Mercer, said: “The data shows that at least 30 per cent of trustee bodies are prepared to ‘trigger’ and take their chances with the regulatory follow-up. The actual total of triggering cases could be as high as 60 per cent – though we don’t know the exact figure as the full trigger formula has not been made public.”

At the time of the study, 49 of the cases surveyed had presented plans to the regulator for assessment.

Of these, 23 per cent were told the regulator would not intervene, 20 per cent had been challenged to justify their approach – although this did not mean they had to change it – 57 per cent had received no response at all.

Keogh added: “We have been surprised at the lack of response over several months on some cases. However, where there has been pushback it has been in line with expectations – generally trustees have been asked to justify their position rather than having their plans rejected out of hand.”

Recovery plans – the name given to policies adopted to increase the assets in schemes with a deficit – are becoming shorter: 94 per cent of schemes plan to achieve their new funding target in 10 years or less, compared to only 38 per cent two years ago. Ten per cent plan to settle the deficits almost immediately through extra contributions.

The survey shows that schemes have increased their funding targets by eight per cent on average over the last two years. The change is primarily to allow for increased longevity expectations.

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