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UK defined benefit pension schemes remain in surplus in wake of inflation hitting 30-year high

04 May 2022

The funding status for the 5,000-plus corporate defined benefit (DB) pension schemes in the UK continues to show that schemes are, on average, in a surplus position, according to PwC’s Pension Trustee Funding Index.

Asset and liability values both fell over April 2022, resulting in a modest increase in surplus to £130bn based on schemes’ own ongoing funding measures. PwC’s Adjusted Funding Index shows a £270bn 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, and a different approach for potential life expectancy changes.

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

“The surplus trend continues for UK pension schemes and, with inflation still rising, this trend is set to continue. Most pension scheme benefits are linked to inflation, but there’s usually a maximum increase that will be paid each year for members. Around nine out of 10 schemes have limits on how much inflation they pass into pension increases. For nearly all of these 4,500 schemes, this cap will be lower than the current rate of inflation, and so their liabilities will not be fully exposed. This gives them a buffer on top of existing surpluses. Even schemes with a modest deficit might well reach surplus by just waiting. There’ll be a few exceptions, including schemes who have put in place insurance or hedging, when a third party will get the advantage from any inflation cap, instead of the scheme.

“Of course, caps on pension increases don’t only have an impact at the scheme level - they will also affect pensioners. Pension increases in defined benefit schemes are also typically only granted once a year, with reference to historic levels of inflation. Pensioners may well need to wait another year until their benefits catch up with the current inflation rates we’re seeing today. There’s a lag effect which doesn’t matter in times of stable and low inflation, but can hurt in times of high and unpredictable inflation.” 

Laura Treece, pensions actuary at PwC, added:

“Pension increases being based on historic levels of inflation doesn’t only impact pensioners in defined benefit schemes. Anyone who gets the state pension will see this in the increase they received in April. State pensions went up by 3.1% - less than half of the inflation rate recorded for March of 7%. And with inflation predicted to keep rising, the extra money going into pensioners’ pockets won’t cover the amount by which their bills are going up now in line with current inflation.

“It’s a tough situation for a lot of people. We’re seeing sponsors and trustees think about how they might help their pensioners. Some are actively considering paying discretionary top-ups to pensions if the high inflation rates we’re seeing continue. This is something we haven’t seen much of recently - discretionary increases were more common in the 1990s when there was no compulsory requirement for pension payments to go up each year. We may start to see more and more schemes bringing back this practice if inflation remains high.”

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

£ billions,

month end

Asset value

Trustee Funding Index

Adjusted Funding Index

Liability value

Surplus / Deficit

Funding ratio

Liability value

Surplus / Deficit

Funding ratio

April 2022

1,690

1,560

130

108%

1,420

270

119%

March 2022

1,730

1,620

110

107%

1,470

260

118%

February 2022

1,730

1,690

40

102%

1,530

200

113%

January 2022

1,780

1,750

30

102%

1,580

200

113%

December 2021

1,860

1,800

60

103%

1,630

230

114%

November 2021

1,870

1,850

20

101%

1,670

200

112%

October 2021

1,820

1,790

30

102%

1,620

200

112%

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%

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

Ends

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Alice Bowdery

Alice Bowdery

Manager, media relations, PwC United Kingdom

Tel: +44 (0)7483 421 921

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