End game planning for DB schemes should be an key priority for 2022/23 valuations, claims Hymans Robertson, the leading independent pensions and financial services consultancy. It says that while the development of end game strategies should be at the forefront of post-pandemic planning, polling from its recent webinar indicates that this is only a key priority for about half (55%) of Trustees for 2022/23 valuations. Reflecting on recent improvements in scheme funding levels, almost 60% of Trustees expected to be approaching triennial funding valuations fully funded on their technical provisions basis.

The firm also found in its webinar poll that around 55% of schemes are expecting to weaken longevity assumptions with a third (32%) focused on taking action to ensure plans stay on track given the continued economic uncertainty.

Laura McLaren, scheme actuary and partner at Hymans Robertson, comments:

“With the funding levels of most pension schemes improved, upcoming actuarial valuations are a great opportunity to focus on developing the ultimate ‘endgame’ plan for discharging a scheme’s liabilities. We’re seeing improved funding and insurer pricing, combined with the maturing of liabilities, meaning that schemes may be much closer to endgame than expected, be that run-off or insurance buy-out. Many schemes won’t have envisaged ever getting to the point of affording buy-out and a lot of trustee boards and sponsors could be surprised when they discover just how close they are.

“Whilst the new funding code won’t apply to valuations before October 2023, many trustee boards are already planning ahead for the requirement to formalise a long-term objective and looking to align that with a preferred endgame destination. The choice of endgame and timescales will influence funding and investment decisions now and, with a majority of pension schemes targeting full settlement of benefits with an insurer, there’s a lot of work needed to be ‘buy-out ready’ including data and benefits cleansing. It’s important to start factoring this into the overall journey plan a number of years out. Ultimately, having an effective strategy in place to see the scheme through to its end really matters – if scheme funding is on track a triennial funding valuation is an opportune time to be engaging stakeholders in developing that journey plan.

“Setting updated longevity assumptions is something all schemes will wrestle with in 2022 valuations. The long-term impact of COVID-19 on life expectancy remains uncertain, with the potential for liabilities to move in either direction as a result, but I’m not surprised to see a growing number of schemes suggesting they’ll make some allowance for a slowdown in longevity improvements relative to the previous valuation.

“Whilst, hanging fire might be the prudent thing to do given the ongoing uncertainty, it would be fair to conclude we won’t catch up on two “lost years” of improvements quickly. At least in the short term, the pandemic is more than likely going to represent a previously unanticipated headwind – both in terms of mortality directly related to COVID-19 and the knock-on effects on health care systems and the wider economy. Against that backdrop there will be cases where making a modest adjustment supported by scenario analysis and contingency planning is reasonable. This is in line with the Regulator’s latest funding statement which suggested it would accept changes to assumptions (versus those used at the previous valuation) so long as the impact was no more than 2%.“