Funding: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor.
The “funding measure without extended allowance for future longevity improvements” adjusts for the following issue: Pension fund trustees typically make an allowance for life expectancy to continue to improve a very long time into the future. However, these pension payments are not yet a commitment - they are just a prudent expectation of what might unfold over the next few decades. Example: If a man aged 40 today is projected to live to 85, but that ends up looking more like 90 thanks to medical or health improvements, that extra commitment isn't going to be due until 45 years from now. Similarly, a woman aged 40 now may be expected to live to 87, but could eventually live to 91. Those extra years of pension in 50 years time, in this example, may not need to be pre-funded now. This adjusted funding measure recasts the deficit by removing this additional allowance for life expectancy improvements, which haven’t yet happened.
Accounting: the target value of liabilities shown in company accounts, based on formal accounting standards which assume asset returns in line with AA-rated corporate bond yields. Pension decision-makers should not rely on the accounting measure to inform their management decisions. Accounting numbers not designed to be tailored to individual pension fund circumstances. They are not in isolation a good basis for deciding the best future strategy for a pension fund's assets and liabilities.
Buy-out: the value an insurer would typically place on the fund's liabilities, which depends on prevailing market terms for these kinds of transactions. It is a hypothetical scenario for all pension funds to buy out their total liabilities in one go as there is not enough capital market capacity to support this. The theoretical deficit on such a buy-out basis would be in excess of £1trn.
Figures provided have been estimated by PwC and Skyval based on publicly available data of UK defined benefit pension funds, including from the Pensions Protection Fund’s dataset.