XPS Group reports that the updated defined benefit (DB) funding rules have been easier to handle than many schemes anticipated, as stronger funding positions have lessened regulatory demands.
According to its recent analysis, Pension valuations: A headache avoided?, the advisory firm noted that early worries regarding tight funding mandates and heightened regulatory duties had mostly not come to pass.
Around 80 per cent of DB schemes are expected to meet The Pensions Regulator’s (TPR) Fast Track criteria, while improved funding levels have allowed valuations to shift from deficit management towards long-term strategic planning.
XPS stated that trustees had originally feared that the updated rules, mandating schemes to aim for a low-dependency funding level by a major milestone, might push schemes toward conservative, lower-return investments sooner than intended.
Rising gilt yields have significantly reduced the value of scheme liabilities, leaving many schemes in a stronger funding position, with some now reporting surpluses on both low dependency and insurance buyout measures.
Consequently, XPS argued that valuations had evolved from exercises focused on managing deficits and securing employer contributions into opportunities to refine long-term funding and endgame strategies.
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XPS highlighted TPR’s Fast Track approach as a key opportunity for trustees to reduce complexity, with the regulator anticipating that around 80 per cent of DB schemes could meet the criteria.
While the bespoke route remained important for some schemes, XPS warned it could require extensive, potentially costly evidence to justify scheme-specific risks.
Nick Vine, head of DB strategy solutions at XPS Group, said: “Having worked closely with trustees on their first valuations under the new regime, I’ve seen a clear gap between what many expected and what has actually happened.”
“For most schemes, the conversation has moved beyond deficits and compliance towards interesting discussions around long-term strategy and the options available.”
However, the consultancy acknowledged that challenges remained for schemes in deficit, with around 10 per cent expected to have a technical provisions shortfall.
For these schemes, valuations would remain focused on repairing deficits and employer affordability, although long-term planning could still inform funding and investment decisions.
