The aggregate surplus of defined benefit (DB) pension schemes rose by around £52.3bn in May, increasing from £378.6bn at the end of April to £430.9bn at the end of May 2023, the latest Pension Protection Fund (PPF) 7800 Index has revealed.

This was based on total assets of £1,385.2bn and total liabilities of £954.3bn, with the funding ratio for UK DB schemes also increasing from 136.1 per cent at the end of April 2023 to 145.1 per cent.

In addition to the overall improvements, the index revealed a fall in the number of schemes in deficit, showing that there were 4,645 schemes in surplus and 486 schemes in deficit in May, down from 691 schemes in April.

In line with this, the deficit of the schemes in deficit at the end of May 2023 had fallen to £2.4bn, down from £4.5bn at the end of April 2023.

PPF chief finance officer and chief actuary, Lisa McCrory, attributed the movements to increases in yields, as well as an update to the s179 assumptions, which pushed liability values on an s179 basis below £1trn for the first time in over 10 years.

She explained: “UK government bond yields rose sharply during May, catalysed by the release of the UK inflation data which saw annual inflation falling, but more slowly than anticipated.

"This has led to predictions that the Bank of England will have to make further increases to the policy rate to combat inflation and return it to the 2 per cent target.

“As yields rose, the value of scheme liabilities fell. Scheme liability values used in the 7800 Index were also impacted by an update to the s179 assumptions.

"This served to further decrease liabilities in May, resulting in an overall fall in liability values on a s179 basis by 3.8 per cent taking them below £1trn for the first time since April 2011.

“As scheme assets weren’t impacted by this change in assumptions and in aggregate schemes are under-hedged to interest-rates, the estimated value of scheme assets fell more slowly resulting in an improvement in estimated funding ratios of 5.5 per cent.”

Standard Life senior business development manager, Matt Richards, also highlighted the latest PPF figures as demonstration that the wider picture is one where many schemes are in a strong position to move towards buy-in or buyout and achieve derisking objectives.

“The insurance market continues to experience extremely high levels of demand, and is on track to see a record number of bulk annuity deals complete this year,” he continued.

“This means preparation will continue to be important for trustees as they look to secure the best outcome for their schemes in a busy market.”

Indeed, Broadstone senior actuarial director, Jaime, Norman, argued that solid administrative process and best-in-class data standards will be “all-important” to attracting insurer attention in a congested market.

“Ongoing monitoring and specialist services will also support rapid transactions in such a competitive market,” Norman continued.

“The DB market remains the subject of much debate with market noise around the use of scheme assets and consolidators, including the potential use of the PPF as a consolidator.

"However, trustees should not be distracted from the basic principle that those schemes that are well governed, have good data and sound investment strategy will have the best options available to them.”

Adding to this, Buck UK head of retirement consulting, Vishal Makkar, clarified that a "large determinant" of a scheme's long-term future is scheme size, warning that while overall funding levels remain healthy, smaller DB schemes are still struggling.

"These smaller schemes also typically have fewer options available to them when it comes to the crowded and competitive buyout market," he stated.

“For these smaller schemes, the future looks less certain and there are no easy solutions. In April, the PPF itself proposed supporting further consolidation in this market.

"This will be a development to watch for DB scheme trustees, even as the launch of the long-expected DB Funding Code paves the way for many larger schemes to reach their endgame goals. A change in the role of the PPF could have repercussions for all DB schemes.”

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