Fully funded, not fully de-risked

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Why strong funding levels may still leave Defined Benefit (DB) schemes exposed

A discussion paper for Australian DB trustees, sponsors and advisers

Executive summary

Improved funding levels have transformed the landscape for Australian defined benefit (DB) schemes. Many schemes now find themselves in a position of relative strength, with funding levels approaching or exceeding full funding. This represents a significant shift from the environment that prevailed for much of the past decade and has created a meaningful opportunity to reassess long-term strategy and progress towards endgame objectives.

However, improved funding does not necessarily mean improved resilience. Many schemes continue to maintain material allocations to growth assets or investment strategies that remain misaligned with their liability profile. As a result, funding levels may be more vulnerable to market volatility than headline metrics suggest.

This dynamic creates a funding paradox: schemes are closer to their endgame than ever before, yet may still be vulnerable to losing that position if conditions deteriorate or opportunities are missed. In this environment, the key differentiator is no longer funding level alone, but the degree of preparedness to act when favourable conditions arise.

Key findings

The analysis presented in this paper highlights several important observations for trustees and sponsors:

Funding positions across the Australian DB market have improved materially, with the average APRA-regulated corporate and retail DB scheme estimated to be approximately 120% funded.
Improved funding has not necessarily been accompanied by a corresponding reduction in investment risk. Many schemes continue to maintain significant exposure to growth assets, leaving funding positions vulnerable to adverse market movements.
In the paper's illustrative stress scenario, a scheme with a 120% VBI and a 60/40 growth-to-defensive allocation experiences a decline to approximately 84% funded, with an A$83 million surplus becoming a deficit position.
Growth assets account for the overwhelming majority of losses under the stress scenario, despite representing only 60% of the portfolio.
Funding resilience, rather than funding level alone, is increasingly the critical measure of endgame readiness. A scheme's ability to preserve strategic flexibility through market cycles may be more important than its reported funding position at any point in time.
Endgame-aligned portfolios demonstrate materially greater resilience under severe market conditions and are better positioned to preserve optionality when opportunities arise.

Implications for trustees

The key question for trustees is no longer simply whether a scheme is fully funded, but whether its funding position is sufficiently resilient to support future strategic decisions. Endgame planning should therefore extend beyond funding metrics and encompass investment strategy, governance, operational readiness and stakeholder engagement.

A structured glidepath to endgame can help schemes progressively reduce unrewarded risks, improve liability alignment and establish the governance and operational frameworks required for successful execution. Schemes that successfully navigate this transition will not necessarily be those with the highest funding levels, but those with the clearest plan and the ability to execute it when conditions are favourable.

Endgame planning

In this paper, endgame refers to the strategic end-state for a DB scheme, whether through continued run-on, a Successor Fund Transfer, an insurance solution such as a buy-in or buy-out, or a combination of these approaches. While the optimal destination will differ between schemes, the common requirement is preparedness. Investment resilience, governance readiness, operational capability and stakeholder alignment all contribute to a scheme's ability to act decisively when opportunities arise.

Ultimately, funding level alone is not the differentiator. The schemes best positioned to achieve their chosen endgame will be those that have protected their funding position, prepared for execution and retained the flexibility to act when market conditions are supportive. Preparedness is the true differentiator.

Authors

Shianne Li, Senior Pricing Actuary - Life Investment Product, Challenger
Leigh Lei, Pricing Actuary - Life Investment Product, Challenger
Meher Edibam, General Manager, Institutional Solutions, Challenger
Chris Bauer, Senior Institutional Business Development Manager, APAC Distribution