Santander DB surplus increases tenfold amid continued focus on de-risking

Santander's defined benefit (DB) pension scheme surplus increased by around £839m over the first six months of 2021 to £932m, up from £93m in December 2020.

The increase was attributed to market-driven improvements, a rise in the discount rate and an increase in growth assets.

The group's half yearly accounts showed an improvement in the accounting position in H1, as the sections in surplus had an aggregate surplus of £1.08bn at 30 June 2021 (£496m in 2020) while the sections in deficit had an aggregate deficit of £113m (£361m in 2020).

The overall funded position therefore showed a £970m surplus, up from a £134m in 2020, which was mainly driven by an increase in the discount rate and increases in the value of growth assets over the period.

The group also benefited from a £745m gain as part of a pension remeasurement, which included £1.098bn in actuarial gains from changes in financial assumptions.

This was alongside a £1.21bn fall in the present value of DB liabilities, from £13.89bn as of December 2020 to £12.68bn as of June 30 20201, while the total value of the DB assets has remained relatively stable, falling by just £373m to £13.61bn.

The fall in liabilities was partly attributed to an around £5bn longevity swap entered into by the scheme in March 2021, which covered approximately 40 per cent of scheme liabilities and around 85 per cent of pensioner liabilities, in turn materially reducing longevity risk.

More broadly, Santander Group confirmed that it was placing a continued focus on achieving the right balance between risk and reward, with the main risk management developments undertaken in H121 including an increase in interest rate and inflation hedging.

This is in line with the group's long-term objective to reduce the risk of the scheme and eliminate the deficit on the funding basis.

The half-year accounts confirmed that the group has already achieved “significant improvements” across most key metrics in the first half of the year, including a reduction in the funding deficit valuation and an improved IAS 19 valuation surplus.

It also confirmed that the funding deficit at risk was £1.2bn, compared to £1,28bn in 2020, stating that the group would continue to reduce risk with further interest rate and inflation hedging, and by reducing exposure to longevity risk across liabilities.

Santander clarified, however, that there remains considerable market uncertainty, explaining that while the actions highlighted above mitigate some of the impact of market movements in yields, its position could change "materially" over a short period.

Expenses for the defined contribution plan were unchanged since 2020, standing at £33m.

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