PwC Pension Funding Index reports UK DB surplus for first time

The PwC Pension Funding Index has reported that UK defined benefit (DB) schemes are in surplus for the first time since it was established in 2014.

It showed an aggregate funding surplus of £30bn in April 2021, following two consecutive months of a ‘neutral’ funding position.

During the month, asset values increased by £20bn to £1,800bn and liabilities declined by £10bn to £1,770bn.

PwC said that the relative stability of assets and liabilities was a consequence of “subdued volatility” in the markets recently and schemes’ own strategies “gravitating to lower volatility approaches”.

"I expect shareholders of companies - whether listed or private - with DB schemes will want to look closely at how they are managing their pension plans, now that funding positions have improved,” commented PwC partner and global head of pensions, Raj Mody.

“For example, many pension plans have substantial investments in index-linked gilts and other assets which are delivering negative real returns. This doesn't seem an efficient way of delivering their pension commitments.

“Trustees of pension schemes, and their advisers, have become conditioned to looking at their funding and investment strategy with reference to gilt yields. It's impossible to make sense of that without also looking at the situation in real terms, after allowing for inflation requirements in their pension scheme benefits.

“As a trustee responsible for your investment strategy overall, you will want to know how your asset portfolio is positioned to deliver a return greater than the cost of benefits you are trying to cover. Are there parts of your portfolio which are dragging you backwards over time, even if you are moving forwards in other areas?

“In any case, as deficits are eliminated and schemes mature, it’s inevitable that thoughts turn to a plan for delivering pension payments with efficient and lower-cost approaches, rather than continuing to run unnecessary risk gambles to close the deficit gap with more complex portfolios.”

PwC pensions actuary, Emma Morton, encouraged sponsors and trustees to take a fresh look at the inflation assumptions they are using to forecast liability values, as “actual inflation has often been significantly lower than the assumptions that actuaries use to work out how much funding is required”.

She continued: “This could be another area where assumptions are overly prudent. It could mean that even more schemes are in surplus. We expect future data to reveal this over time.”

According to PwC’s Adjusted Funding Index, which “incorporates strategic changes that are available for most pension funds”, including a move away from low-yielding gilt investments to higher-return, cash flow generative assets, and a different approach for potential life expectancy improvements that are yet to occur, there was an aggregate surplus of £210bn at the end of February.

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