DB pensions’ funding targets are unrealistic

DB pensions’ funding targets are unrealistic

Funding targets for UK defined benefit (DB) schemes to reach self-sufficiency may not deliver the stability and certainty that trustees and sponsors expect, according to analysis by Aon Hewitt.

The findings of Pensions Stability White Paper – turning theory into reality suggest that true self-sufficiency is expensive and hard to achieve and that new strategies may be required.

Even modest risk accumulates over time, assets are volatile and the only way that a sponsor can be sure of not needing to pay more contributions, is to over-fund the scheme substantially,” said Paul McGlone, partner at Aon Hewitt.

A disadvantage of over-funding for sponsors is that more money will be devoted to the initial outlay. That extra money may mean that clients will have to over-pay in the future. For a scheme to have a 10% chance of future deficit means that there is a 90% chance it will end up having a future surplus, according to the paper.

The majority of UK pension schemes said that self-sufficiency was their main long-term objective in Aon Hewitt’s Global Pension Risk survey last year. McGlone said that pension funds could consider options to improve long-term funding.

“We urge trustees and sponsors to review their funding targets and strategies and to take action to reach a position of stability – meaning fewer surprises, less intervention and a reduced chance of eventual surplus or deficit,” added McGlone.

"Sponsors and trustees should look at options outside of the pension scheme, such as contingent assets, to provide the stability required. As schemes approach full-funding we see having a role to play in long-term funding, rather than just being a specialist tool for specific situations," he added.