The Pension Regulator’s 2023 annual landscape report on DB and Hybrid schemes reveals a consistent decline in the total number of schemes since 2022, down by 2 per cent from 5,378 to 5,297.
The percentage of these schemes that are closed to future accrual (except for those that are in wind-up) has increased from 70 per cent to 72 per cent.
Additionally, since 2022, scheme funding levels have improved; from 2,565 to 3,620, there are now more schemes with funding levels for technical provisions of 100 per cent or above.
The total deficit of schemes in deficit has decreased by more than half, from £63.610 billion to £27.673 billion.
Broadstone Head of Market Engagement Simon Kew says: “The Pension Regulator’s annual review provides a helpful update on the Defined Benefit universe at a time of unprecedented interest in the sector as schemes look to capitalise on funding improvements to reach endgame or self-sufficiency to provide better security for member’s pensions.
“The findings continue to confirm a universe that is reducing in number as more schemes manage to buy-out and one which has seen drastic progression in funding positions. For schemes and trustees, the findings once more re-iterate that the insurance market will be intensely competitive in 2024 and, most likely, through the next couples of years.
“Preparation, good scheme governance, excellent data standards and top-class administration will all be key to attracting and engaging insurers.
“Meanwhile, for larger schemes with strong sponsors, run-on may be an increasingly attractive and appropriate option. This could drive significant economic benefits as the government looks to promote a new regime of productive finance and investment in UK assets.”
Isio partner Andrew Goddard says: “TPR’s report shows the defined benefit (DB) market is shrinking as funding levels improve and schemes mature towards end-game scenarios. Trustees and sponsors are facing crucial decisions around optimal management of assets and liabilities and are increasingly realising the benefits of consolidation.
“The Regulator recently launched its new general code of practice and suggested some DB savers might benefit from higher standards of governance in a consolidation arrangement. Trustees and sponsors are considering consolidation not just to improve efficiencies and better protect member interests, but also because it is often the stepping stone they need to secure their preferred end-game solution.
“If a scheme is nearing buy-out, it can often be challenging in the current market to be noticed by insurers. Smaller DB schemes can benefit from the scale and status offered by a consolidator with a proven track record, which can help them cross the final hurdle.
“Meanwhile, schemes further away from buy-out might face more challenges to get there. For these schemes, joining a consolidator earlier on could ease some of the obstacles over the long-term – allowing them to streamline their path to full funding status and secure member benefits with greater certainty.”
Hymans Robertson head of DB actuarial consulting Laura McLaren says: “The Pensions Regulator’s latest annual report on defined benefit (DB) occupational pension schemes as at 31 March 2023, underscores that the landscape has changed rapidly over the last couple of years.
“The statistics show 73 per cent of all DB pension schemes are estimated to be in surplus on a funding basis, compared with just 50 per cent the year before. The average scheme funding level is estimated to be up by 13.5 per cent percentage points to 114.5 per cent in just 12 months, whilst the total deficit (of schemes in deficit) has more than halved, reducing from £63 billion to £28 billion.
“Driven by material increases in government bond yields and strong asset returns, the market has been alive to this seismic shift. Nevertheless, it makes for interesting reading with so much market and regulatory change in the pipeline and an election on the horizon.
“Under the Mansion House reforms we anticipate a consultation landing shortly on how schemes might generate and use surpluses investing more in productive assets. With the statistics confirming only a minority – less than 4 per cent – of DB schemes remain open to new members now is the time for policymakers to look properly at longer term pensions strategy. Ensuring the regulatory environment balances keeping past benefits secure with offering good quality pensions to current workers.
“In the meantime, TPR and DWP are currently wrangling to make sure the final regulations and funding code are fit for purpose and proportionate given that there is now a very small, and reducing, number of poorly funded schemes.
“And the changes continue to be transformational for the risk transfer market. With a growing proportion of schemes having sufficient assets to buy out their liabilities with insurance companies, 2024 is already looking like it has the potential to be a record year for deals.”
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