UK defined benefit pension scheme funding continues to improve, as PwC Pension Funding Index shows £30bn surplus

May 04, 2021

The aggregate funding position for the UK’s 5,300 corporate defined benefit (DB) pension schemes continues to improve, with PwC analysis showing a clear surplus for the first time since the Index was originally introduced in 2014. This is according to schemes’ own measures, while PwC’s Adjusted Funding Index shows an overall DB pension scheme surplus of £210bn.

Asset values increased modestly over April while liability values fell slightly, leading to a surplus emerging based on schemes’ own measures. The relative stability in results is a consequence of subdued volatility in markets lately, combined with schemes’ own strategies which are gravitating to lower volatility approaches. The combination of these factors appears to be contributing to the outcomes seen over the last few months.

PwC’s Adjusted Funding Index incorporates changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a change in approach for potential life expectancy improvements which are yet to occur. This measure shows a £210bn surplus.

Raj Mody, partner and global head of pensions at PwC, said:

"I expect shareholders of companies - whether listed or private - with defined benefit schemes will want to look closely at how they are managing their pension plans, now that funding positions have improved. For example, many pension plans have substantial investments in index-linked gilts and other assets which are delivering negative real returns. This doesn't seem an efficient way of delivering their pension commitments.

“Trustees of pension schemes, and their advisers, have become conditioned to looking at their funding and investment strategy with reference to gilt yields. It's impossible to make sense of that without also looking at the situation in real terms, after allowing for inflation requirements in their pension scheme benefits. As a trustee responsible for your investment strategy overall, you will want to know how your asset portfolio is positioned to deliver a return greater than the cost of benefits you are trying to cover. Are there parts of your portfolio which are dragging you backwards over time, even if you are moving forwards in other areas?

“In any case, as deficits are eliminated and schemes mature, it’s inevitable that thoughts turn to a plan for delivering pension payments with efficient and lower-cost approaches, rather than continuing to run unnecessary risk gambles to close the deficit gap with more complex portfolios.”

Emma Morton, pensions actuary at PwC, added:

“Sponsors and trustees should take a fresh look at the inflation assumptions they are using to forecast liability values. Actual inflation has often been significantly lower than the assumptions that actuaries use to work out how much funding is required. This could be another area where assumptions are overly prudent. It could mean that even more schemes are in surplus. We expect future data to reveal this over time.”

The PwC Pension Funding Index and PwC Adjusted Funding Index figures are as follows:

 

£ billions,

month end

Asset value

Current Funding Index

Adjusted Funding Index

Liability value

Surplus / Deficit

Liability value

Surplus / Deficit

April 2021

1,800

1,770

30

1,590

210

March 2021

1,780

1,780

0

1,600

180

February 2021

1,770

1,770

0

1,590

180

January 2021

1,800

1,920

-120

1,730

70

December 2020

1,830

2,020

-190

1,820

10

November 2020

1,800

1,990

-190

1,790

10

October 2020

1,760

2,020

-260

   

September 2020

1,780

2,040

-260

   

August 2020

1,760

1,990

-230

   

July 2020

1,780

2,050

-270

   

June 2020

1,780

2,050

-270

   

May 2020

1,780

2,020

-240

   

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