Aggregate DB funding level remains strong despite recent deterioration

The aggregate surplus of defined benefit (DB) pension schemes decreased slightly from £446.1bn at the end of July 2023 to £441.1bn at the end of August 2023, the latest Pension Protection Fund (PPF) 7800 Index has revealed.

This was based on total assets of £1,396.6bn and total liabilities of £955.5bn, with the average funding ratio also falling from 146.4 per cent at the end of July 2023 to 146.2 per cent in August.

The number of schemes in deficit also rose, as the index showed that there were 473 schemes in deficit and 4,658 schemes in surplus.

In line with this, the deficit of the schemes in deficit at the end of August 2023 rose to £2.3bn, up from £2.2bn at the end of July 2023.

Despite the slight deterioration in funding levels over the past month, the index showed that the DB landscape has improved since this time last year, when the average funding ratio was just 127 per cent, with an aggregate surplus of £320.1bn.

Commenting on the findings, PPF chief actuary, Shalin Bhagwan, said: “Aggregate funding levels across the DB universe deteriorated slightly over the past month due to a reduction in the value of pension scheme assets.

"This was offset to some extent by a reduction in liabilities arising from a rise in yields. During the month, yields on long-dated gilts briefly reached levels seen during last year’s market turmoil. This time though, markets remained orderly and the spike in yields quickly reversed.

"Anecdotal evidence suggests that some pension schemes took the opportunity to add to their holdings of gilts, but that, in aggregate, funding level gains of the last 12-18 months haven’t been accompanied by the same level of interest rate and inflation hedging activity as similar gains would have prompted in the past.

"This is perhaps unsurprising as pension schemes seek to review their funding, investment and governance arrangements following the stress in the leveraged LDI market."

Broadstone senior actuarial director, Jaime Norman, also stressed that the small declines in the aggregate surplus and funding ratio must be seen in the context of "huge improvements" to funding over the past two years.

“Pension schemes are in a significantly stronger position now which has led to the intensely competitive de-risking market as schemes look to capitalise by securing the benefits of their members via a buyout," he continued.

"Insurers are scaling capacity to meet demand but schemes need to ensure they are putting themselves in the strongest possible position to attract and engage the attention of insurers.

“Excellent preparation and data quality as well as best-in-class governance and administration will be vital to gaining traction in the current market, particularly for schemes at the smaller end of the market.

“Yesterday the PPF announced it hopes to reduce the levy from £200m to £100m. It will be a source of frustration that legislative constraints prevent the PPF from reducing the levy further given its data continues to prove the improved funding environment.”

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