At least 30% of defined benefit occupational pension schemes are prepared to risk ‘triggering' regulatory follow-up by setting funding targets below the levels set by the Pensions Regulator.
Findings from Mercer Human Resources Consulting’s ‘Statutory Funding Objective (SFO) Valuations Survey’ reveals out of 230 pension schemes which were studied, 49 have so far presented scheme-specific funding plans to the Regulator.
The SFO requires trustees to set scheme specific funding targets, but as no precise rules have been set out by the Regulator for the appropriate level of target Mercer says it has ‘hinted’ at its preferences by setting ‘trigger points’ below which point schemes could be subject to additional investigation.
Tim Keogh, worldwide partner at Mercer, says: “The data shows at least 30% 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% - though we don’t know the exact figure as the full trigger formula has not been made public.”
But of the 49 plans presented to the Regulator, which include funding targets and recovery plans - policies which aim to increase the assets in schemes with a deficit – 23% have been told the Regulator will not interfere, 20% have been asked to justify their approach and 57% have received no response.
Keogh says the firm has been surprised at the lack of response by the Regulator - llasting more than several months in some cases - although he says where there has been “pushback” it is in line with expectations as “generally trustees have been asked to justify their position rather than having their plans rejected out of hand”.
However, Watson Wyatt Investment Consulting warns the Pensions Regulator’s risk-based approach to regulation - in particular scheme specific funding and investment governance - will fail if it only concentrates on improving trustee knowledge and understanding (TKU).
Paul Trickett, European head of investment consulting, says while it welcomes the fact governance of DB schemes is prominent in the Regulator’s three-year corporate plan, it says more needs to be done to bridge the gap between governance and investment strategies.
He says: “Many investment strategies are out of kilter with funds' governance arrangements and this 'gap' cannot, in most cases, be bridged through training alone because of rapidly increasing investment complexity.”
“The destruction of value through unsuitable investment strategies can be avoided if pension funds are honest with themselves about their governance capabilities and organisational effectiveness first, before embarking on complex investment models involving asset diversity and skill-based strategies.”
And he says it is here that the Regulator's influence “would be very helpful”, as the firm claims a recent survey shows only around 40% of UK pension funds have investment strategies and governance arrangements which are aligned.
The remaining funds then break into two groups, with around 50% appearing to be over ambitious in their investment structures given their governance arrangements, while around 10% apparently use over-simple investment structures relative to their governance budgets.
Trickett adds: “It is important to point out risk minimisation programmes, such as ‘effective liability driven investment’, can be a key part of a pension fund’s investment strategy regardless of governance constraints. However, active investment programmes do not suit all funds.”
But despite these fears, Mercer’s latest research reveals 94% of DB schemes plan to achieve their new funding target – and eliminate deficits – within 10 years or less, compared to just 38% two years ago, while 10% plan to settle deficits almost immediately with extra contributions.
In addition, it claims pension funds have increased their funding targets by 8% on average over the last two years, which Mercer suggests is primarily down to increased longevity expectations.
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