DB funding - January 2022: PPF shows funding high

PPF 7800

The aggregate surplus of the 5,215 defined benefit (DB) schemes is estimated to have increased by £17.1bn during January on a Pension Protection Fund (PPF) compensation basis, the lifeboat fund says.

At the end of last month, the combined surplus was recorded at £146.4bn on a section 179 basis, with assets and liabilities falling by 4.6% and 3.4% respectively.

Assets totalled £1,757.0bn and liabilities amounted to £1,610.6bn, compared to £1,818.0bn and £1,688.7bn at the end of December.

Overall, the funding ratio improved from 107.7% to 109.1% - the highest level it has been since 2007.

PPF chief finance officer and chief actuary Lisa McCrory said: "Despite last month's fall in global equities, the ongoing rise in bond yields saw the aggregate surplus of the 5,215 schemes we protect increase by £17.1bn to £146.4bn. This improvement in scheme funding saw fewer schemes in deficit with a reduced aggregate deficit of £80.9bn, a positive trend, which scheme trustees will undoubtedly welcome as they consider their longer-term plans."

XPS

Schemes had a £307bn deficit on a long-term funding target (LTFT) basis at the end of January, according to XPS Pensions Group's DB:UK Tracker.

The funding situation is calculated on a gilts plus 0.5% basis and reveals an £21bn improvement compared to December 2021.

Assets totalled £1,815bn while liabilities were estimated at £2,122bn. These had fallen over January by £53bn and £74bn respectively.

The overall funding level had improved by 0.4 percentage points to 85.5% between December and January - a very similar level to this time last year.

XPS estimated that it will take schemes five years longer to reach their long-term targets compared to this time last year, largely due to the view that investment returns will be lower.

XPS senior consultant Charlotte Jones said: "After a turbulent year, it's one step forward and five steps back as a lot of schemes are finding themselves back where they started in early 2021 and their end-game even further out of reach.

"While frustrating, trustees and sponsors must continue to work together to reach their goals, there are many ways they can get back on track whether it's by exploring the options available to members, reviewing their investment strategies or by simply injecting more cash."

Mercer

Mercer's pensions risk survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK's 350 largest listed companies rose by £4bn over the course of January, standing at £80bn at the end of the month, an increase from £76bn at the end of December.

It said liabilities fell from £913bn at 31 December 2021 to £879bn at the end of January caused by a rise in corporate bond yields offset by an increase in market expectations of inflation. However, asset values fell further to £799bn compared to £837bn at the end of December leading to the increase in deficits.

Mercer UK wealth trustee leader Tess Page said: "The cost of living may be failing to cut through politically amid the Downing Street Party rows, but inflation is certainly giving pension schemes food for thought in 2022.  Investment markets also took a bit of a hit during January, with global equity prices falling back."

Page added: "Trustees and scheme sponsors are looking ahead to a busy year in pensions, with the new code of practice and climate change reporting on the horizon, alongside cracking GMP equalisation and preparing for pensions dashboards. Those schemes that have already tackled their key risks around investments, inflation, and interest rates will be best-placed to navigate 2022."

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. The data underlying the survey is refreshed as companies report their year-end accounts.

PwC

The UK's 5,000-plus corporate defined benefit (DB) pension schemes have overall remained in a surplus position over the last year, according to PwC's latest pension trustee funding index.

The consultant said both asset and liability values fell over January 2022 but still left a surplus of £30bn based on schemes' own ongoing funding measures.

PwC's Adjusted Funding Index shows a £200bn surplus - this incorporates strategic changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes.

Global head of pensions Raj Mody commented: "In an unprecedented run, pension schemes have remained out of deficit for over 12 months."

Mody added that, despite inflation hitting a 30-year high, it's likely that the surplus trend will be sustained and the inflation situation may even generate a greater surplus.

He explained: "Although pension scheme benefits are linked to inflation, the increases are typically subject to a cap. In most schemes this cap is lower than the current rate of inflation, so scheme liabilities are not fully exposed to inflation volatility.

"This will give some protection to the funding health of most schemes, and potentially see even more surplus created as inflation tensions eventually subside."

Mody said running a scheme with a substantial surplus could cause challenges for trustees.

He said: "Trustees' powers are not always well designed to deal with such situations. There can be pressure to spend some of the surplus on improving member benefits, which might sound appealing for members, but can be difficult for trustees to act fairly between different categories of membership. Surpluses can also lead to investment and tax inefficiencies."

PwC pensions actuary Laura Treece added: "Many well-funded schemes are now on the brink of being able to take action to secure members' benefits for good. But their sponsors are increasingly concerned about putting in more cash than is needed to do so.

"They know that if they overshoot the amount required it will be hard to get the excess back. In this new world of persistent surpluses, trustees and sponsors need to re-evaluate the best way of managing their schemes towards their long-term goals."

Treece continued: "Even if the ultimate target is some kind of insurance buy-out, instead of continuing to pay cash into an already well funded scheme, sponsors could pay this into a separate funding vehicle. This money can be used to support the pension scheme, but won't be tied up if not all of it is needed. It would help avoid future stranded surplus, and the associated loss of value."