New funding approach could result in £70bn surplus for DB schemes

A new funding approach for defined benefit (DB) pension schemes could leave their overall funding position at a surplus of £70bn, according to PwC.

Its Adjusted Funding Index suggested an overall DB pension surplus of £70bn in January 2021 if schemes switched to the new approach from their own measures.

The new index incorporates strategic changes available for “most” pension schemes, including a move away from gilt investments to higher-return, cash flow generative assets, along with a new approach for funding long-term potential life expectancy improvements that are yet to happen.

“The Adjusted Funding Index shows what the funding position would be if trustees and sponsors made various changes to their investment and funding strategies,” explained PwC global head of pensions, Raj Mody.

“Current approaches to pension scheme management may be out-of-date, having been created in different conditions. Innovation in markets allows pension schemes to access new opportunities, as they continue to mature and the profile of their obligations changes.

“Deploying these techniques would wipe out the aggregate deficit in DB pension schemes, allowing sponsoring companies to reinvest spare cash in their businesses, new jobs and the wider economic recovery.”

The DB funding deficit, according to schemes’ own measures, fell by £70bn to £120bn in January, PwC revealed, lower than at any point during 2020.

Overall liabilities declined by £100bn to £1,920bn, although this was slightly offset by asset values falling by £30bn to £1,800bn during the same period.

Mody added: “2020 was a turbulent year for geopolitics, the economy and the country as a whole, full of uncertainty for both markets and individuals.

“The last couple of months of the year showed signs of improvement for pension schemes financial health, which has sustained into early 2021.”

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