The average funding position and proportion of defined benefit (DB) schemes in surplus hit their highest levels since the start of the current funding regime in 2005, although there is a wide variation between schemes, analysis from Aon has found.

Aon’s report revealed that the average technical provisions funding level had risen from 92% to 97%, while nearly half (47%) of schemes were found to be fully funded or in surplus.

In addition to this, the proportion of schemes requiring a recovery plan fell from 67% to 53%.

Improvements were also seen in the average recovery period for schemes in deficit, with an average recovery period of 4.3 years for tranche 17 valuations in deficit, which was around 1.2 years shorter than three years ago.

The use of additional security was also on the rise amid recent market shifts, as Aon found that 63% of under-funded schemes had put in place additional security, marking the highest percentage to date, while 36% of schemes in surplus had opted to use contingent security.

In particular, 57% of schemes used a parent company or group guarantee, 29% opted for contingent contributions, and 12% looked to charge over property, while a minority opted for options such as letter of credit, surety bonds, or asset backed contributions.

The use of these contingent security arrangements was more prevalent amongst the larger schemes, as the research found that 55% of schemes with technical provisions of over £100m opted to use contingent security, compared to 32% of schemes with technical provisions of under £100m.

Adding security in relation to the covenant was the primary reason to use additional security, cited by 74% of schemes, while 11% said that they were look to address the risk of a trapped surplus.

Indeed, Aon noted that, as schemes have moved to surplus, for some, the focus has turned to the potential for a trapped surplus, suggesting that non-cash security may mitigate the risk of over-funding.

Looking further ahead, however, Aon noted that whilst funding levels for schemes with valuation dates between 22 September 2022 and 21 September 2023 are similar to the latest batch of valuations, there is a wide variation around this average, reflecting the differing impacts of the rise in gilt yields over the period.

Aon also warned that whilst funding improvements have prompted increased demand in the pension risk transfer market, insurer staffing capacity is likely to act as limiting factor in terms of capacity.

Changes to the UK insurance solvency regime are expected to help offset some of the pressures to increase pricing, although Aon argued that the Chancellor’s Mansion House reforms could also trigger an expansion in the endgame options available to schemes and further support alternative endgames to insurer buyout.

“Trustees and employers are considering the full spectrum of endgames in order to assess which will deliver the best outcomes for pension scheme members and sponsors,” Aon’s report stated.

“The Mansion House reforms may further expand the options available to endgame schemes”.

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