UK DB pension schemes' surplus increases by £20bn

The aggregate funding position of the UK’s defined benefit (DB) pension schemes was in surplus for the third consecutive month in June, according to the PwC Pension Funding Index.

Schemes were found to be, on average, in a “clear surplus position”, recording a £20bn increase on the previous month, to £50bn.

This was as a result of an increase in asset values from £1,790bn to £1,810bn over June, whilst liability values remained stable at £1,760bn.

However, PwC pensions actuary, Emma Morton, argued that trustees and sponsors should reflect on the fact that pension schemes are in surplus, warning that it is "not efficient to continue to pay money into a scheme that’s in surplus".

She stated: “While it’s right that schemes are run prudently, only those looking to transfer the scheme to an insurance company should consider deliberately building up a surplus, to cover the insurance premium that they will need to pay.

“Where sponsors are not planning to transfer their scheme to an insurance company, if they continue to pay cash into a well-funded scheme, it’s inevitable that they will end up with a trapped surplus.

“Few scheme sponsors will be familiar with handling a trapped surplus, given pension scheme surpluses have been rare in recent history.

“It is notoriously difficult for sponsors to get a surplus back. Not only can it leave the funds tied up for years, but potential refunds would be subject to additional tax charges, higher than corporation tax rates.”

PwC’s Adjusted Funding Index, which incorporates strategic changes available for most pension funds, including a move away from gilt investments to higher-return, cashflow generative assets, and a different approach for potential life expectancy improvements that are yet to occur, showed a surplus of £230bn in pension schemes.

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