Aggregate DB pension deficit falls to zero in February

The aggregate funding deficit of the UK’s defined benefit (DB) pension schemes was “wiped out” in February, as it fell from £120m to zero, according to PwC.

This is the first time the aggregate DB pension funding position has not been in deficit since PwC began producing its Pension Funding Index in 2014.

The neutralised funding position was attributed to the combination of continued deficit recovery contributions and evolving forecasts for future unknowns, such as inflation and life expectancy.

Although asset values declined from £1,800bn to £1,770bn during February, this was offset by liabilities falling from £1,920bn to £1,770bn during the same period.

PwC partner and head of pensions, Raj Mody, stated that although it was “reassuring” that DB schemes had neutralised their aggregate deficits, it was “no surprise” due to continued deficit recovery contributions and more favourable market conditions.

“It would be wrong to think the position for pension schemes is now sorted for good,” he warned.

“It’s not necessarily the case that the recent improvement in forecast long-term yields is here to stay.” 

According to PwC’s Adjusted Funding Index, which “incorporates strategic changes that are available for most pension funds”, including a move away from low-yielding gilt investments to higher-return, cash flow generative assets, and a different approach for potential life expectancy improvements that are yet to occur, there was an aggregate surplus of £180bn at the end of February.

“The £180bn surplus on the Adjusted Funding Index shows many schemes have hidden buffers relative to alternative and more transparent measures of their funding status,” said Mody.

“They could now use these to secure their position, which would help protect members’ benefits, as well as release extra cash from the sponsoring company so it can invest in its business and jobs. That’s a win-win all round, for employees, pension members and scheme trustees.”

Meanwhile, Mercer’s Pensions Risk Survey found that the accounting deficit of FTSE 350 firm’s DB schemes increased by £13bn to £79bn during the month.

It found that although liability values decreased by £31bn to £858bn, a movement driven by increased corporate bond yields that were offset by an increase in inflation expectations, asset values also declined, by £44bn to £779bn.

“Markets are showing signs of nervousness,” commented Mercer chief actuary, Charles Cowling.

“These are testing times for pension schemes – particularly in the industries hardest hit by the pandemic. It is possible to see scenarios where scheme liabilities continue to rise, pension asset values are under fire and more companies get into difficulty and possibly even falling into insolvency.

“The situation is not gloomy for all trustees. Many, thankfully, have now de-risked their pension scheme investments and largely matched their assets to their liabilities.

“Nevertheless, some pension schemes are running more risk than can be easily supported by the strength of the employer covenant. The Pensions Regulator guidance on integrated risk management suggests pension trustees reduce risks to levels that can be managed by their struggling employers. That’s easier said than done.

“Pension scheme deficits can be filled only by investment performance or additional funding from employers. De-risking, reducing the potential for future investment gains, can make the pension scheme numbers appear worse, increasing employer funding, and increase pressure on employers. 

“In these challenging times, pension trustees should monitor their risks carefully and should consider taking opportunities to reduce them when and where possible.”

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