Significant increase in surplus for UK’s Defined Benefit pension schemes, according to PwC’s Pension Trustee Funding Index

The position of the UK’s 5,000-plus corporate defined benefit (DB) pension schemes continues to strengthen with an increase in surplus over May 2022, according to PwC’s Pension Trustee Funding Index.

With bond prices continuing to fall significantly, the value of the liabilities which schemes need to cover fell over May. Asset values also dropped over the month, but to a lesser extent. These factors combined, resulted in a £60bn increase to the surplus, creating an overall surplus of £190bn based on schemes’ own measures. The outcome for individual schemes will vary according to how much they have hedged against market movements.

PwC’s Adjusted Funding Index shows a £320bn surplus. This incorporates strategic changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets. It also uses a different, more practical approach for the longevity assumption. 

Longevity forecasting is an area sponsors and trustees should review again now. The Pensions Regulator (TPR) noted in their recent Annual Funding Statement that the impact of Covid-19 remains highly uncertain, with divergent views in the market. The statement indicated that where an allowance for Covid-19 is made in longevity assumptions, they would expect any reduction in liability values to be no more than 2%.

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

“Pension schemes remain well funded based on their own assessments for funding purposes, improving again this month in aggregate. This includes a prudent allowance for potential life expectancy improvements which have not yet happened. It’s natural for pension funds to make conservative assumptions, but they should understand the size of these reserves as part of their planning. Otherwise their decisions around risk management might be out of kilter. Long-term life expectancy is notoriously difficult to predict, and forecasts are often presented in complicated language and parameters making it hard for trustees and sponsors to tune into the details. Advisers should be challenged to explain matters in practical terms and real-life scenarios.”

Laura Treece, pensions actuary at PwC, added:

“Consider an example pension scheme member, say a female who is currently aged 45. Based on current estimates of life expectancy, we might expect her to live to age 86. If we instead use prudent assumptions, which include an allowance for improvements which could happen in the future, she might be expected to live until age 89. Even if those improvements do happen, the three extra years of pension payments that she would receive are in 40 years’ time.

“Most schemes have already added reserves to their funding in case this kind of member lives until 89. There will be situations where it’s appropriate for sponsors and trustees to adjust down their current prudent forecasts. TPR’s suggested limit of a 2% reduction represents longevity improvement trends being suppressed for an eight-year period, before returning to rates expected before the pandemic. This still forecasts the example 45-year-old female to live until age 88. It assumes there will be changes in the future that will increase her life expectancy by two more years, compared to what we know now. If you extrapolate that to millions of members in all schemes, that gives a £70bn reserve for potential improvements in life expectancy that have not yet happened. If it turns out that this is not needed, it will end up as even more surplus.

“It’s important that each scheme thinks about their strategy and goals when deciding what - if any - changes are needed to their assumptions as a result of the pandemic. For example, schemes who would like to transfer their pension risk to an insurance company in the next few years may not see material explicit allowance for the impact of Covid-19 in the pricing they receive from insurers or re-insurers. It might make them rethink their overall strategy to de-risking and take a different view on the optimal approach.”

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

Notes:

1. The Pension Trustee Funding Index measures the aggregate funding deficits of the UK's defined benefit schemes. The Index reflects how schemes currently measure themselves. The Adjusted Funding Index reflects an alternative strategic approach.
2. The Pension Trustee Funding Index measures how much cash sponsoring companies need to pay in. It is not the same as the accounting disclosures which use different assumptions primarily for the purposes of company accounts and prescribed reporting obligations, and do not directly affect cash funding. A scheme can have a surplus on an accounting measure but still require new cash to cover a deficit on a funding measure. It is also different from the Pension Protection Fund’s measure, which uses a standard set of assumptions and does not count full benefits.
3. The PwC Indices covers the whole universe of over 5,000 UK defined benefit pension funds. Some other trackers cover just a minority subset (eg fewer than 10% of schemes), so may show different trends.
4. The estimated asset value for the UK’s defined benefit pension schemes is based on monthly data from the PPF 7800 index, tracked over each month based on the movement in asset indices using data provided by Refinitiv. 
5. PwC experts are available for interview - please contact Alice Bowdery on +44 7483 421921 /  alice.bowdery@pwc.com

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