Steven Dicker, PwC’s chief actuary, said:
"Despite the increase in short-term interest rates by the Bank of England, long-term real interest rates, which are the main driver of the pension deficit number, moved slightly in the opposite direction. This resulted in a £60bn increase to liabilities over the month with assets growing modestly at £20bn, resulting in a net £40m increase in deficit.
"The economic drivers of long-term interest rates are complex and they are further impacted by supply and demand factors including quantitative easing, which leads to month to month swings in the deficit calculation using the ‘gilts plus’ approach."
Notes to editors
Notes on deficit measures:
- Funding measure: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor.
- Figures provided have been estimated by PwC and Skyval based on publicly available data of UK defined benefit pension funds, including from the Pensions Protection Fund’s dataset.
- Other pension deficit measures exist but are generally not meaningful for tracking the health of UK pension funds. For example:
o Accounting: the target value of liabilities shown in company accounts, based on formal accounting standards (such as IAS19) which typically assume asset returns in line with AA-rated corporate bond yields. Pension decision-makers should not rely on the accounting measure to inform their management decisions. Accounting numbers are not designed to be tailored to individual pension fund circumstances. Some commentators publish IAS19 tracking figures but they are not in isolation a good basis for understanding pension funding status, nor deciding the best future strategy for any given pension fund's assets and liabilities.
o Buy-out: the value an insurer would typically place on the fund's liabilities, which depends on prevailing market terms for these kinds of transactions. It is a hypothetical scenario for all pension funds to buy out their total liabilities in one go, as there is not enough capital market capacity to support this. Some commentators cite the theoretical deficit on such a buy-out basis as in the region of £1trn, but, in practice, this is not a cost which could or would ever be incurred in this way.
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