Surge in funding level triggers but schemes divided on best way to implement them

There has been a dramatic growth in implementation of funding level triggers, but schemes are divided on the best way to implement them, a survey from Aon Hewitt survey shows.

The survey – which covered schemes ranging in size from under £10 million to over £5 billion – shows the extent and nature of their use, and demonstrates both that a substantial proportion of schemes now have them in place, and that there is considerable variation in the way they are implemented.

Paul McGlone, principal and actuary at Aon Hewitt, says: “Funding level triggers are typically designed to reduce a pension scheme’s allocation to return-seeking assets as the funding position improves and as the scheme no longer needs to seek as much return.

“We estimate that up to 10 per cent of schemes have these strategies in place, and that the majority of those have been put in place within the past two to three years. The fact that we were able to gather a sample of over 60 schemes so quickly is clear evidence of this growth.

“We expect the prevalence of funding level triggers to continue to increase and for them to become regarded as a standard practice for pension schemes. We also expect that the availability of products and services to support schemes in this area will increase, making them more widespread across schemes of all sizes.”

Aon Hewitt says the growth in use of funding level triggers can be attributed to a number of factors. Schemes have faced “regret risk” if they have missed opportunities to bank improvements in their funding position but until recently ways in which this could be avoided have been limited, particularly for schemes below a certain size. There are now more tools and services available in the market to make funding level triggers more effective and these – combined with the general desire to avoid missing opportunities and also to de-risk – have fired the increase in their usage, it says.

McGlone says: “One of the key findings of the survey was that almost three-quarters of schemes with triggers are aiming for a long term target that is more than their statutory ’technical provisions’.

“That suggests that the interest in flight plans and triggers is not about schemes just doing the same thing with some new jargon, but is genuinely making a difference to the long term plans that schemes and sponsors have.”

The survey also found that triggers fell into two broad categories in terms of how they are implemented. On the one hand, a number of schemes operate the fast-moving automatic triggers, which tend to involve monitoring funding position on a daily or weekly basis, some approximation of the funding position to allow this to happen, often some delegation to ensure that the monitoring takes place, and then an automatic asset switch when a trigger is hit.

The other type are the slower but more considered triggers which typically look at the funding position on a monthly or quarterly basis. These, if there is an indication that a trigger has been hit, act as prompt for discussion by the trustees after they have considered advice. Asset switches are then made only after due consideration and approval.

McGlone says: “The divergence in approaches reflects a number of factors. While automatic triggers generate faster decisions and avoid the emotion and time commitments that can hamper decision-making, triggers with more manual intervention can allow further consideration on both the funding level and also on the reasons for the improvement and the prevailing market conditions.”