Defined benefit (DB) pension scheme surpluses could be used to reduce the intergenerational pensions gap, PwC has said, after its analysis revealed that DB schemes continue to have sufficient assets to buyout their pension promises with insurance companies.

PwC's latest Buyout Index recorded a £160m surplus in April, after a rise in long-term bond yields saw the estimated buyout cost fall during the month, while asset values broadly held up.

This also pushed the average funding ratio for UK DB schemes to 113 per cent, up from 109 per cent in March 2023.

PwC’s Low Reliance Index, which assumes schemes invest in low-risk, income-generating assets like bonds, also continued to show a "healthy surplus" of £320bn, with PwC suggesting that schemes are therefore unlikely to call on the sponsor for further funding.

However, PwC head of pensions funding and transformation, John Dunn, noted that while the UK’s DB pension schemes remain in good health, a debate about who will benefit from this surplus is on the horizon, with candidates including insurance companies, sponsoring companies, and scheme members, who are typically Baby Boomer and Gen-X cohorts.

“With Millennial and Gen-Z workers in the private sector typically having lower defined contribution (DC) savings, an argument could be made for an intergenerational transfer," he continued.

"Overall pension wealth could be improved by boosting the pensions of younger workers using the surplus assets which are now not required to provide secure pensions for the older generations.”

These concerns were shared by PwC DC pensions and benefits lead, Roshni Patel, who pointed out that for every private sector employee that participates in a DB pension scheme, there are at least five others contributing to their employer’s DC pension arrangement.

"DC savers typically have much lower pension values than those in DB schemes, and a lot of them could be at risk of not having enough put aside for a comfortable retirement," Patel continued.

“It’s also been estimated that about one fifth of private sector employees aren’t saving anything for their retirement. We’ve recently seen an increasing trend of people opting out of DC pension schemes or reducing their contribution rates, which will only act to increase the intergenerational disparity.

"The proposed forthcoming changes to auto-enrolment regulations will bring a new and younger generation into scope, those aged between 18 and 22. This could be a great first step towards reducing the intergenerational pensions gap.”

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