DB funding — Feb 2022: Mixed picture on deficits

Capita

Capita's FTSE 350 scheme funding tracker found a 0.1 percentage point fall in funding levels, which fell back to 95.8% at the end of the month.

The consultancy said liabilities had fallen by £23bn to £797bn, while assets had also fallen by £23bn to £763bn. This meant the overall deficit remained at £34bn.

It said the decrease in liabilities was due to increases in corporate bonds yields.  However, it said this was partly offset by the impact of inflation, driven in part by rising energy prices.

Capita said assets continued to fall back following the Russian invasion of Ukraine. Equity markets have sold off and the situation continues to escalate, creating a huge amount of uncertainty.

It noted that the impact of sanctions means that most Russian equities are not trading and some schemes are writing any Russian linked holdings down to zero.

The consultant said while this situation was hugely concerning, it said most UK defined benefit schemes have little direct exposure to Russian equities adding it was the ancillary wider market movements that are currently having a bigger impact.

Capita said sponsoring employers should be speaking to their advisers if in any doubt about how the situation could be affecting the valuation of their pension obligations - something it said was particularly important for any companies with 31 March year ends.

PPF

The aggregate surplus of the 5,215 defined benefit (DB) schemes is estimated to have decreased by £12.8bn during February on a Pension Protection Fund (PPF) compensation basis, the lifeboat fund says.

At the end of last month, the combined surplus was recorded at £133.6bn on a section 179 basis, with assets and liabilities falling by 1.4% and 0.75% respectively.

Assets totalled £1,732.2bn and liabilities amounted to £1,598.6bn, compared to £1,757.0bn and £1,610.6bn at the end of January.

Overall, the funding ratio decreased from 109.1% at the end of January 2022 to 108.4% at the end of February.

PPF chief finance officer and chief actuary Lisa McCrory said: "While the aggregate funding position for the 5,215 DB schemes we protect remains positive overall, a fall in global equity assets, offset by an increase in most bond yields, has seen the aggregate surplus fall to £133.6bn. This also means more schemes are in deficit with an increased aggregate deficit of £83.1bn. Although the change at an aggregate level is small, the impacts on some individual schemes may be more significant."

XPS

Schemes had a £319bn deficit on a long-term funding target (LTFT) basis at the end of February, according to XPS Pensions Group's DB:UK Tracker.

The funding situation - calculated on a gilts plus 0.5% basis - reveals an £2bn deterioration compared to the end of January 2021.

Based on assets of £1,778bn and liabilities of £2,097bn, the average funding level of UK pension schemes on a long-term target basis was 84.8% as of 28 February 2022.

XPS said the change in funding levels over February was relatively small - with liabilities falling due to rises in gilt yields, partially offset by further rises in inflation.

It said while this move will have generally been beneficial for the funding level of pension schemes that are not yet fully hedged, it noted that a simultaneous decline in growth market assets will have negatively impacted most UK pension scheme funding levels over the month.

XPS said growth assets continued to react negatively to the prospect of monetary policy measures to combat inflationary pressures, as well as the impact of the escalation of conflict in Ukraine.

The consultant said the ongoing Russia-Ukraine conflict as well as inflation concern meant there would be increased volatility for some time.

XPS chief investment officer Simeon Willis said: "The scope for the situation to deteriorate further is self-evident. However, markets are forward looking and therefore current news and the potential for further deterioration may already be factored into prices. Consequently, this may not represent a sensible time for wholescale changes in strategy.

"That said, if your portfolio does not currently reflect your risk tolerance and you wish to make changes, it is important to recognise the significant intra-day price fluctuations. This can be managed by approaches such as pre-investing trades to reduce time out of the market and breaking up transactions across a number of smaller trades."

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 fell by £4bn over the course of February, standing at £76bn at the end of the month, a decrease from £80bn at the end of January.

It said liabilities fell from £879bn at 31 January to £846bn at the end of February as increases in market expectations of inflation were offset by a fall in corporate bond yields. Asset values also fell to £770bn compared to £799bn at the end of January leading to the fall in deficits.

Mercer UK wealth trustee leader Tess Page said: "The tragic situation in Ukraine is quite rightly at the top of the news agenda. Any comment will be out of date quickly as the situation is very fluid, but in the short term the conflict has not had a significant impact on the figures we see here for February."

Page added: "It is too soon to know what the longer term economic impacts will be. However, it seems likely that they will include higher energy prices, further disruptions to supply chains, market volatility and liquidity pressures. Whilst UK DB pension schemes typically have very low direct exposure to Russia, it is the wider market fall-out that will test integrated risk management plans. As ever trustees who have taken steps to understand and control their risk exposures should be better placed".

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 funding status for the 5,000-plus corporate DB pension schemes in the UK continues to show that schemes are, on average, in a surplus position, according to PwC's latest pension trustee funding index.

The consultant said both asset and liability values both fell over February 2022, resulting in a surplus of £40bn 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.

PwC global head of pensions Raj Mody said: "Pension schemes generally remain well funded based on their own assessments for funding purposes, despite the volatility and disruption in markets over February.

"Many sponsors and trustees are now revisiting their journey plans - their long-term goals and how they're going to get there. Those who are focused on securing members' benefits for good might find that they are closer to that goal than they realise. They should be careful not to build up more money than is needed as there have been many situations of schemes being overfunded and value lost in the process of moving to a third party."

PwC said that, with its pension trustee funding index showing a sustained period of surplus, well-funded schemes that want to transfer to a third-party, such as an insurance company, are close to being able to do so.

But it said other assessments of their position are helpful too - adding that trustees and sponsors should stay focused on the measures which best align with their scheme-specific strategy.

PwC head of pension risk transfer Swapnil Katkar explained: "For schemes planning to transfer their pension risk to a third party, traditional measures of their funding, like technical provisions or solvency, may not give them the best indication of where market pricing is and how it is moving.

"For example, insurance companies typically invest a significant amount in credit assets like bonds. Their pricing will depend on the returns they can generate in the market, and is therefore heavily influenced by credit spreads on those assets. Schemes considering other market solutions, like consolidators or third-party capital backed solutions, would need different measures depending on the target investment strategy and the returns underwritten by the provider.

"If schemes focus on measures which align with their target strategy, then they will have a better chance of being ready to transact when the time is right."