The collective funding level of UK defined benefit (DB) pension schemes reached a record surplus of £230bn in August 2023, according to PwC’s Buyout Index.

The Buyout Index reflects PwC’s view of indicative market pricing based on its current experience of completing buy-in and buyout deals.

It noted that an increase in long-term gilt yields during August reduced the estimated buyout cost for DB schemes in the UK, resulting in a £20bn rise in the surplus.

According to the Buyout Index, total DB schemes asset values fell by £20bn in August to £1,390bn, while liabilities values decreased by £40bn to £1,160bn.

The funding ratio therefore increased from 118 per cent to 120 per cent during the month.

Meanwhile, PwC’s Low Reliance Index, which tracks the position of the UK’s DB schemes based on a low-risk income-generating investment strategy, estimated that the DB pension surplus increased by £10bn in August to £360bn.

According to the Low Reliance Index, asset values fell by £20bn to £1,390bn and liabilities fell from £1,060bn to £1,030bn, while the funding ratio increased from 133 per cent to 135 per cent.

Due to the improved funding levels, an increasing number of schemes are seeking to broker transfers to the insurance market, according to PwC.

However, it noted that many schemes with buyout as their planned endgame had found themselves with sufficient assets “significantly sooner” than they expected, meaning it was likely there was still a lot to do before the scheme could transact, including ensuring their data is ‘trade ready’.

“Many DB pension schemes can now afford insurance due to improved funding levels, but few have their ‘house’ in order and records ready for a transaction,” commented PwC head of pensions funding and transformation, John Dunn.

“One area that we see needing focus in almost every insurance transaction is the data the scheme holds on its members.

“While member data is good enough to pay benefits today, many pension schemes need to improve the quality of their data to allow them to pass the scheme over to an insurer.

“This could mean anything from simply manipulating data so that it is in a format that insurers will accept, to gathering extra or missing data on, for example, members’ spouses, to larger exercises where whole data sets are updated and transformed to take account of benefit changes.

“As a result, improving data has become a key priority for many trustees and sponsors of DB pension schemes so they can get their ‘house’ on the market.”

Also commenting on the funding update, PwC pensions partner, Gareth Henty, noted that the increased focus on scheme data comes at a challenging time for the pensions administration industry.

“Many trustees and companies are therefore finding themselves on long waiting-lists, which can hold them up if they need to improve the quality of their data before they can start proper pricing processes with insurers,” he added.

“As early as possible in a scheme’s journey to the insurance market, it’s critical that sponsors and trustees fully understand any limitations in their data from the insurer’s perspective, and how and when these can be resolved.

“Timing is key - insurers will need some data sooner than others. Prioritising and improving the critical areas sooner will help schemes stay agile in the busy buyout market and give them more certainty, enabling them to take advantage of opportunities that arise.”

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