Paradigm shift for defined benefit pensions as schemes remain fully funded, PwC’s Pension Funding Index shows

Apr 01, 2021

The funding status for the UK’s 5,000-plus corporate defined benefit (DB) pension schemes continues to show that deficits have, on average, been neutralised with the aggregate deficit remaining at zero, PwC analysis shows. 

Assets and liability values both increased slightly over March, resulting in a similar position to last month, based on schemes’ own measures. While on aggregate there is no funding deficit, there will be individual schemes which are still in deficit and where recovery contributions will continue to be paid. 

PwC’s Adjusted Funding Index incorporates strategic changes available for most pension funds, including a move away from gilt investments to higher-return, cash flow generative assets, and a different approach for potential life expectancy improvements which are yet to happen. This measure shows a £180bn surplus.

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

"This is a paradigm shift for defined benefit pension schemes. The industry has become conditioned to expect pension funds to have deficits. It's not surprising that - after years of cash repair payments and investment returns - eventually they have reached a fully funded position, in aggregate at least. We'd expect this to hold for various reasons. As the economy recovers this will likely be positive for asset values relative to liability values. 

"There will be short-term volatility so trustees and sponsors will want to have contingency plans, even if in many cases this is simply monitoring and riding out the volatility because the company covenant and pension fund can bear it.

“It's worth trustees taking a fresh look at their position to ensure they have an accurate assessment of any residual deficit, to avoid running unnecessary risk. In particular, there have been major changes to the way inflation and longevity could be forecast, and the approach in some schemes may now be out of date."

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

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

   

April 2020

1,750

1,960

-210

   

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