04 Jul 2022
For the second month in a row, the position of the UK’s 5,000-plus corporate defined benefit (DB) pension schemes has increased by £60bn taking the total surplus for June 2022 to £250bn based on schemes’ own measures, according to PwC’s Pension Trustee Funding Index. Overall, DB pensions schemes are now holding a surplus of a quarter of a trillion pounds over and above the assessment of their payout requirements. This is the highest surplus ever recorded by the Index since it was introduced in 2014.
The increase in surplus has come about as the value of the liabilities which schemes need to cover fell over June, mainly driven by long-term bond yields continuing to rise. Asset values also fell over the month, but not by as much. So despite market volatility in asset prices, pension surpluses on average continue to increase.
PwC’s Adjusted Funding Index now shows an even higher surplus at £360bn - this assessment incorporates strategic changes available for most pension funds, including a move away from lower-yielding gilt investments to higher-return, income-generating assets, along with a different approach to pre-funding potential life expectancy changes.
Raj Mody, global head of pensions at PwC, said:
“DB schemes reaching a record surplus this month is a stark reminder of what pension schemes are about. Assets are invested not just for the sake of it, but to cover long-term pension liabilities - and the value of those liabilities continues to reduce as long-term yields gradually rise.
“Seemingly scheme surpluses are getting bigger and bigger. However, it's important to remember that this is in aggregate - the picture is different at an individual level. While more schemes will now be in surplus, perhaps around 3,500 of them, this will range from very large surpluses to those which are more borderline.
“There are about 1,500 schemes still in deficit. For many of those they will likely just need time to eliminate the deficit, as investment returns come good and prudent margins get released, instead of any additional cash payments from their sponsoring company.
“For those with surpluses at the smaller end of the range, it’s important that trustees and sponsors understand how their surplus has been determined, including what approximations have been made. Sometimes there are ‘unknown unknowns’ unless you know where to look.
“The method for tracking a surplus might use an overly simplistic approach over time, presented in a glossy way through a technology portal, but actually some can be pretty rough and ready under the bonnet. Membership data could be out-of-date, benefit interpretations may not have been independently verified. There might be a disconnect between the actuarial valuation and member administration systems. Financials are volatile and some systems may not be set up to cope well with, for example, much higher than expected inflation. All of these issues and others could serve to rebase what looked like a comfortable surplus position into something more balanced.”
Laura Treece, pensions actuary at PwC, added:
“Trustees and sponsors should bear in mind that they might need to use up some of their surplus if any issues come to light for their scheme. For those looking to transfer their pension risk to a third party, we’re seeing a lot of data quality concerns arise in the run up to transactions. If not addressed quickly and managed carefully, dealing with data problems can easily eat up a surplus. For example, we've been brought in to try to salvage a situation where the scheme surplus was originally estimated to be £25m, but now looks like only £5m after some data cleansing.
“Schemes that are looking to transact should plan ahead and identify any discrepancies that could push them off course. This will help them to fix things early on in the process, so they can stay on track to achieve their long-term goals.”
The Pension Trustee Funding Index and Adjusted Funding Index figures are as follows:
£ billions, month end |
Asset value |
Trustee Funding Index |
Adjusted Funding Index |
||||
Liability value |
Surplus / Deficit |
Funding ratio |
Liability value |
Surplus / Deficit |
Funding ratio |
||
June 2022 |
1,590 |
1,340 |
250 |
119% |
1,230 |
360 |
129% |
May 2022 |
1,640 |
1,450 |
190 |
113% |
1,320 |
320 |
124% |
April 2022 |
1,690 |
1,560 |
130 |
108% |
1,420 |
270 |
119% |
March 2022 |
1,730 |
1,620 |
110 |
107% |
1,470 |
260 |
118% |
February 2022 |
1,730 |
1,690 |
40 |
102% |
1,530 |
200 |
113% |
January 2022 |
1,780 |
1,750 |
30 |
102% |
1,580 |
200 |
113% |
December 2021 |
1,860 |
1,800 |
60 |
103% |
1,630 |
230 |
114% |
November 2021 |
1,870 |
1,850 |
20 |
101% |
1,670 |
200 |
112% |
October 2021 |
1,820 |
1,790 |
30 |
102% |
1,620 |
200 |
112% |
September 2021 |
1,810 |
1,790 |
20 |
101% |
1,620 |
190 |
112% |
August 2021 |
1,850 |
1,830 |
20 |
101% |
1,650 |
200 |
112% |
July 2021 |
1,850 |
1,840 |
10 |
101% |
1,660 |
190 |
111% |
June 2021 |
1,810 |
1,760 |
50 |
103% |
1,580 |
230 |
115% |
May 2021 |
1,790 |
1,760 |
30 |
102% |
1,580 |
210 |
113% |
April 2021 |
1,800 |
1,770 |
30 |
102% |
1,590 |
210 |
113% |
March 2021 |
1,780 |
1,780 |
0 |
100% |
1,600 |
180 |
111% |
Notes:
The Pension Trustee Funding Index measures the aggregate funding deficits of the UK's defined benefit schemes. The Index reflects how schemes currently measure themselves. The Adjusted Funding Index reflects an alternative strategic approach.
The Pension Trustee Funding Index measures how much cash sponsoring companies need to pay in. It is not the same as the accounting disclosures which use different assumptions primarily for the purposes of company accounts and prescribed reporting obligations, and do not directly affect cash funding. A scheme can have a surplus on an accounting measure but still require new cash to cover a deficit on a funding measure. It is also different from the Pension Protection Fund’s measure, which uses a standard set of assumptions and does not count full benefits.
The PwC Indices covers the whole universe of over 5,000 UK defined benefit pension funds. Some other trackers cover just a minority subset (eg fewer than 10% of schemes), so may show different trends.
The estimated asset value for the UK’s defined benefit pension schemes is based on monthly data from the PPF 7800 index, tracked over each month based on the movement in asset indices using data provided by Refinitiv.
PwC experts are available for interview - please contact Alice Bowdery on +44 7483 421921 / alice.bowdery@pwc.com
Ends
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