DB funding - Oct 2022: PPF surpluses stable

PPF

The aggregate surplus of the 5,215 schemes in the PPF 7800 index is estimated to have increased to £374.7bn at the end of October 2022, from a surplus of £374.5bn at the end of September 2022, the Pension Protection Fund (PPF) says.

The PPF said the funding ratio decreased from 134.8% at the end of September 2022 to 133.6% at the end of October.

Assets totalled £1,490.3bn and liabilities amounted to £1,115.6bn, compared to £1,450.5bn and £1,076.0bn at the end of September 2022.

It said there were 756 schemes in deficit and 4,459 schemes in surplus - noting the deficit of the schemes in deficit at the end of October 2022 was £5.8bn, up from £5.3bn at the end of September 2022.

PPF chief finance officer and chief actuary Lisa McCrory said: "Although volatility remains a key theme, with liability values increasing by around 3%, this was broadly offset by increases in the asset values. There was, therefore, only a slight deterioration in the 7800 index over the month, with the aggregate funding ratio decreasing from 134.8% at the end of September 2022 to 133.6% at the end of October.

"Pension schemes in aggregate therefore remain in a much better position compared with this time last year. It's important that trustees and sponsors reflect on what this higher rate and inflationary environment means for their funding and investment strategy going forward."

Mercer

The accounting surplus of DB pension schemes for the UK's 350 largest listed companies increased to £29bn at the end of October, analysis of Mercer's Pensions Risk Survey data shows.

The consultancy said liabilities fell from £605bn at 30 September 2022 to £600bn at the end of October driven by a fall in future implied inflation expectations largely offsetting falling corporate bond yields. It said the reduction in bond yields was also positive for asset values, which increased over the period to £629bn compared to £610bn at the end of September.

Mercer said that, despite short-term operational and liquidity issues arising from the events at the end of September, many schemes will have benefited from recent market volatility and may now be considering how they convert the funding gains into reduced risk investment strategies or how to implement risk transfer activities.

Principal Matt Smith said: "The aggregate funding position on an accounting basis has improved following the market turmoil at the end of September and the continued market volatility over October, settling at a surplus £29bn at the end of October.

"This may be the first time trustees and employers have been within touching distance of estimates of insurance pricing, and some may be underprepared. In a busy insurance market, schemes may be fighting for attention and well-run schemes may be exploring the growing range of options available to them."

Mercer said that, rather than defaulting to buy-in and buyout as the only options, trustees might also consider alternatives such as consolidators, master trust and low-dependency run-on, which could offer attractive benefits in a higher yield environment.

Smith also said schemes may face issues regarding inflation after the September to September figures - used by many schemes to determine pension increase - were revealed by the Office for National Statistics on 19 October.

Smith explained: "Many schemes will have a cap on pension increases, resulting in members' pensions eroding in real terms in the current high-inflation environment. Others may have no increase and in other cases, increases will be discretionary.

He said: "Trustees and employers may come under increasing pressure from members to provide additional or discretionary increases in light of the increase in the cost of living. While various factors will influence decision-making on this point, it may be harder to justify not providing additional increases based on funding levels alone when some schemes may now see funding levels closing in on buyout."

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 remain in a strong solvency position overall, with sufficient assets to buy out their pension promises with insurance companies, despite liability-driven investment (LDI) strategies continuing to cause short-term liquidity issues for some schemes in October, latest analysis from PwC reveals.

The professional service's firm's buyout index - one of two new pension funding indices it introduced last month - tracks the position of the UK's DB schemes against an estimated cost of insurance buyout.

PwC said the estimated buyout cost rose slightly in October, driven by falling long term bond yields. However, it added that increases in asset values throughout the month resulted in PwC's Buyout Index maintaining a broadly unchanged funding level, with a surplus of £170bn.

Last month PwC also introduced its low reliance Index, which shows the position of the UK's DB schemes assuming a low-risk income-generating investment strategy, where the scheme would be unlikely to call on the sponsor for further funding. PwC said that, despite market volatility in October, this also shows a significant surplus of £330bn.

PwC head of pensions funding and transformation John Dunn explained: "The UK gilt market had another ‘Grand Old Duke' month, putting pressure on schemes to pay additional collateral across to LDI managers as these funds built up increased buffers against further shocks. However, if we look at both sides of the balance sheet - comparing asset values to the expected liabilities - collectively UK DB schemes have continued to remain very well funded despite volatile markets.

"The recent improvements in funding levels of UK DB schemes have been driven, in the main, by increases in long-term bond yields during 2022 - which were at first steady, then rapid.  This trend could change but, in the short term at least, many pension schemes have an opportunity to lock in an improved funding position. From an investment perspective, we see this increasing the trend towards investment strategies with lower return requirements, lower complexity and therefore cost, and a greater focus on delivering the cash flows needed to pay pensions."

PwC head of investment oversight Keira-Marie Ramnath added: "The current funding position for UK DB schemes highlights that the recent challenges with  liability driven investments have not thus far resulted in a solvency crisis but a short-term liquidity crisis.

"Many schemes with improved funding levels should now be able to simplify their investment strategy and reduce costs and risks as a result of lower deficits or increased surpluses. However, it is critical for schemes which took rapid action to maintain liquidity to properly understand the impact this has had on funding and reset their investment strategies accordingly. We expect schemes to re-evaluate investment strategies and governance models. In tandem, many investment providers will re-evaluate their business models in the months ahead."

She continued: "For trustees looking to give greater certainty to members, there is a win-win investment approach available - invest to deliver the cash flows needed to pay pensions. This means investment portfolios with lower risk, lower cost, lower complexity and less LDI leverage.   These portfolios are now even more attractive given improved funding levels and the regulatory direction of travel."

XPS Pensions Group

UK pension schemes' funding positions have increased by around £13bn over the month to 28 October 2022 against long-term funding targets, XPS Pensions Group's DB:UK funding tracker reveals.

The consultant said, based on assets of £1,504bn and liabilities of £1,456bn, the aggregate funding level of DB pension schemes on a long-term target basis was 103.3% as of 28 October 2022.