The aggregate funding ratio of defined benefit (DB) pension schemes in the UK deteriorated slightly in December 2023, despite an increase in DB schemes' combined surplus, the latest Pension Protection Fund (PPF) 7800 Index has revealed.

The tracker showed that the aggregate surplus of UK DB pension schemes increased to £428.2bn at the end of December 2023, up from £425.5bn at the end of November 2023.

According to the tracker, total liabilities increased 7.4 per cent over the period to £1,000bn, which was partially offset by a 5.3 per cent increase in total assets to £1,428.2bn.

“This was the result of government bond yields falling sharply in December as global inflation took a downward turn and central bank communication, in particular from the Federal Reserve and European Central Bank, validated market expectations that rate cuts are coming in 2024, giving the markets the opportunity to price those rate cuts coming earlier and more sharply," PPF chief actuary, Shalin Bhagwan, explained.

However, Bhagwan pointed out that while the fall in government bond yields caused the value of both hedging assets and liabilities to rise, the rise in scheme asset values wasn’t enough to keep pace with the rise in liability values, meaning that funding ratios saw a small deterioration.

Indeed, the PPF's tracker showed that the funding ratio fell from 145.7 per cent at the end of November 2023 to 142.8 per cent in December, which Bhagwan highlighted as evidence of the increased risk from persistently higher volatility in interest rate markets.

The overall number of schemes in deficit had fallen, however, as the tracker showed that there were 582 schemes in deficit, down from 595 in November, and 4,468 schemes in surplus, compared to 4,455 in November.

In line with this, the deficit of the schemes in deficit fell from £4.1bn at the end of November 2023 to £3.7bn in December 2023.

Industry experts also stressed that, despite the dip in the aggregate funding ratio, DB funding has remained strong, as Broadstone pointed out that the continued surplus growth means that the aggregate funding position increased by £51.5bn in 2023.

"The wider picture of vastly improved funding through the DB scheme universe is clear," Broadstone senior actuarial director, Jaime Norman, said, noting that buyout is now more affordable and achievable for many schemes, creating an "intensely competitive" de-risking market.

“Given congestion is likely to continue into 2024 and beyond, schemes within touching distance of buy-out should be focusing on their data to ensure they are in the best possible position to attract the attention of insurers," Norman continued.

"With rates now starting to fall, insurers will be laser focused on choosing the most commercially attractive schemes to take on and preparation will be paramount.”

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