Pension scheme trustees and sponsors have been urged to review their standard valuation approaches, after PwC figures revealed a £30bn jump in the UK defined benefit (DB) pension deficit in September.

According to PwC’s Pension Funding Index, the deficit figure has reached £260bn, up from £230bn in August, and is "drifting closer" to the peak of £290bn recorded around the start of lockdown.

PwC's figures showed that DB scheme assets increased by £20bn during September to reach £1,780bn, while liabilities rose by £50bn to £2,040bn.

The firm attributed the increased deficit to a drop in the long-term real interest rate in September, which was partially offset by a “modest increase” in asset value due to bond holdings by pension schemes.

PwC head of global pensions, Raj Mody, stated that whilst there is a measured deficit of £260bn, it is important to remember that funding targets will include a margin for prudence.

He explained that although this is sensible “in principle”, trustees and companies should understand this prudence “transparently”, by knowing how much extra margin is built in in pound terms, rather than being hidden in “opaque, technical assumptions", which are difficult to interpret.

Mody continued: “There should also be a plan for what would happen if those extra reserves aren't needed, as otherwise the pension fund might become overfunded and tie up precious cash which companies could use to invest in their business and jobs.

“We’d encourage trustees to own their destiny when it comes to scheme funding approaches and regulatory requirements.

“If they can justify their own bespoke approach, and break out of the trap of measuring everything purely with reference to gilt yields, then this could be better for all stakeholders. Prudence is a good thing, but over-prudence might not be.”

Mody stressed that a single-point deficit figure is not what matters anymore, emphasising that trustees and sponsors should be more concerned about the risk of falling short on the cashflows which they have to pay out each year.

“This would be a better way of running a pension scheme, with less distraction from any single deficit figure,” he argued, stating that understanding what cashflow shortfalls might occur over the next few decades would be “a better measure of a scheme's financial health”.

He emphasised that a strategy based on that measure would also reduce the “true risk” of falling short amid market volatility, noting that you could have no actuarial deficit, but still have a cashflow problem, or likewise, could appear to have a deficit but actually have strong cashflows.

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