UK pension scheme funding level improved "significantly" during the second and third quarters of 2013 with more than 40% of schemes survey seeing triggers activated by improving investment returns, Aon Hewitt has found.

These market dynamics have enabled many schemes to recover some of the losses incurred throughout 2012 and early 2013, Aon Hewitt said.

According to Aon Hewitt's Pension Risk Tracker, at the beginning of January 2013 the FTSE 350 pension scheme collective deficit stood at over £400bn due to a combination of successive months of low gilt yields following quantitative easing, but by early December 2013, the collective deficit had reduced to under £300bn.

Paul McGlone, Aon Hewitt partner, said: "Many of the schemes we surveyed in previous years were substantially 'under water' compared to where their triggers were, and needed to increase their funding position by 10% on average just to reach their next trigger level.

"However the last year, and the second and third quarters of 2013 in particular, have been more positive as UK schemes benefited from increasing gilt yields while growth assets in their portfolios also performed strongly. For many pension schemes, this has allowed them to recover their funding positions – and to start to consider opportunities for de-risking their investment strategy."
The research is based on Aon Hewitt's third annual UK Pensions Scheme Triggers survey, which covers over 120 schemes ranging from £10m to over £10bn in assets.

The survey found that 20% of UK pension schemes currently have a formal trigger strategy in place either as a monitor of funding levels or bond yields. The aim of the triggers is to prompt a trustee review of funding strategy as certain pre-agreed levels are breached.

McGlone said: "The key point is that schemes need to ensure they have some way to monitor their financial health and take action if necessary. Recent guidance from The Pensions Regulator (TPR) encourages schemes to look at ways of managing risk, and triggers are an excellent way of prompting important discussions among trustee boards."

Sion Cole, partner and head of client solutions in Aon Hewitt's delegated consulting team, said: "Awareness and speed are critical for schemes which want to take advantage of market opportunities.

"We have seen that schemes with triggers have typically been swifter to respond to the improving funding environment, either removing some riskier return seeking assets from their portfolio, or looking to mitigate the risk through interest rate hedging.

"The good news is that the improvements in funding position seen in Q2 and Q3 are largely still with us and there is good reason to expect that further de-risking opportunities are likely to occur during 2014."

First published 17.12.2013

monique_simpson@wilmington.co.uk