DB pension surplus grows to £40bn

The aggregate surplus of defined benefit (DB) pension schemes in the UK continued to grow last month, standing at £40bn as of the end of February 2022, according to the PwC Pension Funding Index.

This represents a £10bn improvement on the previous month, based on assets of £1,730bn, down from £1780bn as of the end of January 2022, and liabilities of £1,690, down from £1750bn in January 2022.

PwC’s Adjusted Funding Index, meanwhile, which incorporates strategic changes available for most pension schemes, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes, has remained at a surplus of £200bn.

This figure also incorporated strategic changes available for most pension schemes, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes.

Commenting on the latest update, PwC global head of pensions, Raj Mody, noted that pension schemes generally remain well funded based on their own assessments for funding purposes, despite the volatility and disruption in markets over February.

"Many sponsors and trustees are now revisiting their journey plans - their long-term goals and how they’re going to get there," he continued.

“Those who are focused on securing members’ benefits for good might find that they are closer to that goal than they realise. They should be careful not to build up more money than is needed as there have been many situations of schemes being overfunded and value lost in the process of moving to a third party.”

PwC also previously noted that DB schemes have remained out of overall deficit over the past 12 months, highlighting this sustained period of surplus as demonstration that well-funded schemes that want to transfer to a third party, such as an insurance company, are close to being able to do so.

However, the firm clarified that other assessments of their position remained helpful, noting that trustees and sponsors should stay focused on the measures that best align with their scheme-specific strategy.

PwC head of pension risk transfer, Swapnil Katkar, commented: “For schemes planning to transfer their pension risk to a third party, traditional measures of their funding, like technical provisions or solvency, may not give them the best indication of where market pricing is and how it is moving.

“For example, insurance companies typically invest a significant amount in credit assets like bonds. Their pricing will depend on the returns they can generate in the market, and is therefore heavily influenced by credit spreads on those assets.

“Schemes considering other market solutions, like consolidators or third party capital backed solutions, would need different measures depending on the target investment strategy and the returns underwritten by the provider. If schemes focus on measures which align with their target strategy, then they will have a better chance of being ready to transact when the time is right.”

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