Funding regime changes could unlock 'half a trillion pounds' of DB assets

Changes to the funding regime for defined benefit (DB) pension schemes could release almost "half a trillion pounds'" worth of assets to be invested elsewhere, such as productive finance, according to analysis by PwC.

The research revealed that pension scheme investment in gilts has more than doubled from 23 per cent to 50 per cent over the past decade, with over £900bn of pension scheme assets are currently invested in gilts.

However, PwC noted that if the new funding regime from The Pensions Regulator was less focused on gilts, pension scheme asset portfolios could be more varied, potentially releasing almost half a trillion pounds' worth of assets to be invested elsewhere.

The analysis was published alongside the PwC Pension Funding Index update, which revealed that the aggregate funding position of DB schemes has remained in surplus for a tenth consecutive month, despite a £10bn fall in the total surplus to £20bn in November.

The index revealed that assets had increased from £1,820bn to £1,870bn in November, although this was offset by increases in liabilities from £1,790bn to £1,850bn.

PwC global head of pensions, Raj Mody, commented: “Pension schemes remain well funded overall based on their own assessments for funding regulation purposes. But this is just one estimate at a point in time, and is closely tied to the value of gilts.

“This is not necessarily helpful for trustees and sponsors when they are making real-life decisions or working out their best strategy for delivering member benefits in an efficient and secure way.

“The focus on gilts when calculating pension scheme liability values in the current regime causes all sorts of dysfunctions and inefficiencies in pension scheme management.

“It inevitably influences decision-making. Some trustees and sponsors over-invest in gilts to try and match how their liability values are assessed for funding regulation purposes, to reduce the chance of nasty surprises - what you measure is what you get.

“When The Pensions Regulator introduces its new approach for pension scheme funding assessments, hopefully it will take the opportunity to bring this more in line with the practical realities of what defined benefit schemes are required to do.

“This could focus on the cashflows a scheme has to pay out over time, rather than just a single-point gilts-based valuation. A different approach could free up pension schemes to invest more efficiently in a diverse range of income-generating assets.”

Adding to this, PwC pensions actuary, Laura Treece, suggested that changes in the way pension schemes are assessed could allow more of their assets to be invested in productive UK assets, in turn helping to generate the positive real returns needed to pay benefits for members.

She continued: “It would also support long-term economic growth, innovation and opportunities for the UK economy. This in turn is good for the health of the pension scheme and its sponsor - it’s a virtuous circle.

“Many sectors and stakeholders are keen to remove some of the barriers to pension scheme investment. If the new funding regime allows schemes to focus more on their long-term cashflow requirements, they might have one obstacle out of the way when it comes to building an efficient portfolio.”

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