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UK defined benefit pension schemes show £20bn surplus although inflation strategies remain a concern

Sep 30, 2021

The funding status for the UK’s 5,300 corporate defined benefit (DB) pension schemes continues to show that schemes are, on average, in a clear surplus position, according to the PwC Pension Funding Index.

Asset and liability values both fell over September, resulting in a surplus of £20bn based on schemes’ own measures. This is similar to the position last month, with the aggregate funding position staying out of a deficit for the last eight months.

PwC’s Adjusted Funding Index incorporates strategic changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes. This measure shows a £190bn surplus.

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

“Our funding index shows that pension schemes on the whole remain in a good position. But even well-funded schemes need to have the right strategies to stay in good health. Recent inflation figures will remind sponsors and trustees of the importance of positive real returns on their asset portfolios.

“Huge demand from pension schemes for index-linked gilts has driven up prices, so these assets now deliver negative real returns. These market distortions don’t only impact assets - they affect liability valuations too. Trustees can unknowingly end up in a situation where their whole approach is built on a misleading picture. They have to ask the right questions of their various advisers to build a complete understanding of alternative and more efficient strategies.”

Laura Treece, pensions actuary at PwC, added:

“The supply and demand imbalance for inflation protection in markets means that forecasting inflation using market predictions is not very reliable. Sponsors and trustees should review their inflation forecasts and assumptions. This could have a significant impact on their pension scheme funding level. It might be better than they thought.

“A more accurate understanding would help schemes avoid taking unnecessary risk, or tying up extra cash. These schemes might be closer to their ‘endgame’ than they realise. If their strategy includes transferring to an insurance company or DB consolidator, this also means fewer years of paying running costs, and securing member benefits sooner than expected.”

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

Funding ratio

Liability value

Surplus / Deficit

Funding ratio

September 2021

1,810

1,790

20

101%

1,620

190

112%

August 2021

1,850

1,830

20

101%

1,650

200

112%

July 2021

1,850

1,840

10

101%

1,660

190

111%

June 2021

1,810

1,760

50

103%

1,580

230

115%

May 2021

1,790

1,760

30

102%

1,580

210

113%

April 2021

1,800

1,770

30

102%

1,590

210

113%

March 2021

1,780

1,780

0

100%

1,600

180

111%

February 2021

1,770

1,770

0

100%

1,590

180

111%

January 2021

1,800

1,920

-120

94%

1,730

70

104%

December 2020

1,830

2,020

-190

91%

1,820

10

101%

November 2020

1,800

1,990

-190

90%

1,790

10

101%

October 2020

1,760

2,020

-260

87%

     

September 2020

1,780

2,040

-260

87%

     

August 2020

1,760

1,990

-230

88%

     
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Richard Pain

Richard Pain

Manager, media relations, PwC United Kingdom

Tel: +44 (0) 7841 071 907

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