UK DB pension surplus increases by £10bn

The aggregate funding position of the UK’s defined benefit (DB) pension schemes remained “relatively stable” over August, with PwC’s Pension Funding Index recording an aggregate surplus of £20bn.

This represents a £10bn increase on the £10bn surplus recorded in July, and the fifth consecutive month that the index has remained in surplus, having reached a surplus for the first time in April since the index was established in 2014.

The increase was attributed to a slight fall in liability values from £1,840bn to £1,830bn, whilst assets remained stable at £1,850bn.

PwC’s Adjusted Funding Index, which considers strategic changes available for most pension funds, such as switching from low-yielding gilt investments to higher-return, income generation assets, and a more realistic approach to life expectancy changes, also showed a “sizeable surplus” of £200bn.

PwC pensions actuary, Emma Morton, commented: “A significant number of pension schemes are now in surplus. This is evident from our analysis of the aggregate funding position.

“While it’s right that sponsors and trustees should fund their schemes prudently, it’s important not to be too prudent. Once a scheme is in surplus, it is difficult for the sponsor to get that money back, even once all the scheme’s benefits have been secured.

“Over-funding schemes isn’t necessarily in trustees’ or members’ best interests, either. Scheme rules often don’t make it clear how a surplus should be spent, and it can be a dilemma for trustees to decide whether to use a surplus to increase members’ benefits or return it to the sponsor - particularly if the sponsor can ill afford to write this money off. Refunds of surplus are also subject to a 35 per cent tax charge.

“It's far more common for sponsors to pay money into a scheme, than it is to get that money back. Sponsors and trustees should keep this asymmetry in mind when funding schemes.

“If the valuation was carried out at a date when markets made the funding position look particularly bad, and the funding position has since improved, these improvements should be taken into account when deciding how much cash the sponsor should pay into the scheme.”

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