The funding status of the UK’s 5,300 corporate defined benefit (DB) pension schemes continues to show that schemes are, on average, in a clear surplus position, according to the latest PwC Pension Funding Index.
“Asset values increased over June while liability values remained stable, resulting in a modest increase in surplus to £50bn based on scheme’s own measures,” said PwC.
“This highlights the relative stability in the market, with the aggregate funding position staying out of a deficit for the last five months.”
PwC’s Adjusted Funding Index which “incorporates strategic changes available for most pension funds” shows a £230 billion surplus in pension schemes.
“The PwC Adjusted Funding Index takes into account available strategies such as a move away from low-yielding gilt investments to switching to invest in higher-return, income-generating assets,” said PwC.
“It also takes a more realistic approach to life expectancy changes.
“In comparison, other measures automatically factor in unrealised life expectancy increases when calculating total liability values. ”
Emma Morton, pensions actuary at PwC, said: “Trustees and sponsors should reflect on the fact that pension schemes are, on aggregate, in surplus.
“It’s not efficient to continue to pay money into a scheme that’s in surplus.
“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.”
Meanwhile, the latest Mercer Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for the UK’s 350 largest listed companies fell by £9 billion over the course of June to £72 billion.
“The increase was driven by an £11bn increase in assets to £814bn compared to £803bn at the end of May,” said Mercer.
“Liability values rose from £884bn at 31 May 2021 to £886bn at the end of June 2021, driven by a fall in corporate bond yields offset by a small fall in market expectations for future inflation.”
Mercer chief actuary Charles Cowling said: “Funding levels continue to improve as markets remain favourable, despite the looming threat of inflation and the UK’s challenging emergence from the Covid-19 lockdown.
“This month, inflation hit a two-year high and the Bank of England expects it to rise further.
“However, the Bank still voted last week to hold interest rates at their current record low levels and their quantitative easing program unchanged …
“These conditions are challenging for pension schemes and trustees who, with no respite on persistently high pension liabilities, are being called on by TPR to establish a clear path to their long term objective.
“But with positive market conditions, there are opportunities for trustees to lock into gains and get ahead on this journey.
“Trustees should therefore be vigilant to such opportunities and consider planning now how they propose to meet the Regulator’s new objective.”
Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts.