UK DB pension surplus nearly triples; around 2,000 schemes remain in deficit

The aggregate surplus of defined benefit (DB) pension schemes in the UK continued to strengthen in March, almost tripling from £40bn to £110bn as of the end of the month, according to PwC’s Pension Funding Index.

The index revealed that the value of DB liabilities fell from £1,690bn to £1,620bn last month due to a reduction in bond prices arising from global uncertainty, whilst asset values remained at £1,730bn after recovering from the market volatility throughout the month.

This resulted in a significant improvement in scheme funding levels, with the funding ratio for DB pension schemes increasing to 107 per cent.

In addition to this, the surplus according to PwC’s Adjusted Funding Index, which incorporates strategic changes available for most pension schemes, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes, increased to £260bn.

However, PwC global head of pensions, Raj Mody, clarified that whilst pension scheme funding levels had shown resilience and improved on aggregate, when looking at a scheme by scheme basis, a different picture emerges.

"We expect about 3,000 schemes are in a surplus position, leaving around 2,000 schemes in deficit," he stated.

"There is some pattern according to scheme size - the smallest and very largest schemes find themselves in surplus. This leaves a strained segment in the middle typically in deficit, and those schemes will still need a plan to repair those deficits.”

Adding to this, PwC pensions actuary, Laura Treece, explained that strategies for pension schemes that still have a deficit will be very different to those in surplus, and vice versa, emphasising that there are several areas for trustees to manage carefully.

She continued: "They may need to rely on the sponsor’s ability to pay money into the scheme to fund the deficit, perhaps for several more years. Even if no more cash is required but it’s a waiting game to become better funded over time, trustees want to know they can rely on a resilient sponsor business.

“Trustees and sponsors of schemes in surplus will have more options available, and sooner than they originally thought possible, in terms of defining and reaching their ‘endgame’.

"In the meantime, they will want to manage any surplus buffer and their overall strategy with the same diligence they applied when in deficit. It’s all too easy to leak value from inefficiencies in investment, risk and governance decisions when in surplus.

“No matter whether a scheme is in surplus or deficit, there are several areas to manage carefully. This includes the scheme’s ability to pay cashflows as they fall due, particularly given current volatility in asset prices and yields."

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