'Paradigm shift' as aggregate DB pension deficit remains at zero

The aggregate funding deficit of the UK’s defined benefit (DB) pension schemes has remained “neutralised” at zero for a second month running, according to analysis from PwC.

The group revealed that asset and liability values both increased “slightly” over March, resulting in a similar position to last month, when the aggregate funding deficit was “wiped out” for the first time since 2014.

Both assets and liabilities increased by £10bn to £1,780bn.

Despite this, PwC has also emphasised that there are individual schemes which are still in deficit and where recovery contributions will need to continue to be paid.

PwC partner and global head of pensions, Raj Mody, highlighted the circumstances as a “paradigm shift” for DB schemes, arguing that the industry has become “conditioned” to expect pension funds to have deficits.

However, he also clarified that it's "not surprising" that after years of cash repair payments and investment returns, DB schemes would eventually reach a fully funded position, in aggregate at least, stating that this is expected to "hold" for various reasons.

He explained: "As the economy recovers this will likely be positive for asset values relative to liability values.

"There will be short-term volatility so trustees and sponsors will want to have contingency plans, even if in many cases this is simply monitoring and riding out the volatility because the company covenant and pension fund can bear it.

“It's worth trustees taking a fresh look at their position to ensure they have an accurate assessment of any residual deficit, to avoid running unnecessary risk.

"In particular, there have been major changes to the way inflation and longevity could be forecast, and the approach in some schemes may now be out of date."

PwC’s Adjusted Funding Index, which incorporates strategic changes available for most pension funds, including a move away from gilt investments to higher-return, cash flow generative assets, and a different approach for potential life expectancy improvements that are yet to occur, showed a £180bn surplus.

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