Setting up long-term funding targets

Long-term funding targets are critical to regulatory compliance

The Pensions Regulator now expects all trustee boards to set long-term funding objectives. This involves putting together a suitable long-term funding target with a plan of how to achieve it.

Both target and plan must reflect individual scheme circumstances, including:

  • The scheme’s current financial position
  • The funding approach adopted, such as any contribution schedule in place
  • The current investment strategy and any changes as the funding level evolves.

How can First Actuarial help?

Long-term funding review

We prepare a review, in which we put forward a potentially suitable long-term funding target along with a supporting rationale, meeting the expectations of The Pensions Regulator. The review incorporates our understanding of the scheme, its trustees and the sponsoring employer. We liaise with the Scheme Actuary as needed.

Our long-term funding target review includes a detailed report of advice and recommendations, providing:

  • Short-term and long-term risks
  • Financial modelling, which allows us to demonstrate the impact of different approaches on the funding position, and how it develops over time
  • Projections of likely scheme size at the point where the long-term funding target is likely to be reached
  • A suitable investment strategy for the point at which full funding is achieved
  • Cashflow information to support the modelled projections
  • Suitable timeframes for long-term funding targets, in line with regulatory expectations, allowing for the scheme’s maturity and investment approach, as well as any contributions received.

Long-term funding target advice

Within our advice, we fully consider the existing funding position and objective, investment strategy, and any deficit contribution schedule in place. Alternative long-term funding targets and investment policies are also considered and critically assessed.

We choose from a range of potential approaches to long-term funding in our advice, including:

  • Low sponsor dependency
  • Insurance buy-outs and buy-ins
  • Consolidation vehicles.

Low sponsor dependency

Also known as ‘self-sufficiency’, this involves increasing the likelihood of reducing reliance on the sponsor in the payment of benefits. The extent to which a scheme can achieve this depends on the funding method used and the investment strategy adopted.

We make use of sophisticated risk modelling to assess the various options, projecting how the funding position will develop over time in each case.

Insurance buy-outs and buy-ins

Securing benefits by purchasing an insurance policy tends to be an expensive approach, due to the cautious investment strategies of insurance companies and high contingency margins in their pricing.

We are in regular contact with insurance companies, and have up-to-date knowledge of the latest pricing terms. This allows us to provide robust estimates of the likely buy-out costs, and identify opportunities when they arise in the market.

Our analysis takes account of:

  • The lower insurance cost of pensioners compared with non-pensioners
  • Members taking cash when they retire, which brings down the cost of insurance
  • Costs associated with buy-out, such as legal fees and insurer selection.

Consolidation vehicles

Consolidation vehicles can be used in arrangements that take on the liabilities of a scheme, but at a cost that is typically 10% less than an insurance buy-out. This market is in its infancy but should be investigated where insurance buy-out is under consideration.

We review the providers operating in this area and can advise on the feasibility of this approach, as it will not be suitable for every scheme.

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Help to consider how funding evolves as funding level improves

In our initial investment strategy review, we consider how the asset allocation is likely to evolve as the funding position improves over time. This is in line with regulatory expectations.

We offer a service which helps protect your funding levels by setting criteria for investment switches that align with your investment strategy.

Why choose First Actuarial?

First Actuarial offers a cost-efficient approach for producing and agreeing a long-term funding target.

We have considerable experience in setting objectives, and have developed useful tools to support our clients.

Learn more about our investment consultancy services

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Get in touch

Get in touch with one of our investment consultants to discuss how we can help you.

Investment briefings

We produce regular briefings to update trends on the latest market developments.

They provide an excellent service by guiding those involved with the Scheme towards the Scheme’s Long Term Funding Target.

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