The aggregate defined benefit (DB) pension scheme surplus in the UK increased by £60bn to £250bn in June, according to the PwC Pension Trustee Funding Index, marking the highest surplus recorded since the launch of the index in 2015.

The index showed that whilst asset values fell over the month amid market volatility, this was more than offset by a larger fall in liabilities, as long-term bond yields continued to rise.

Liabilities fell by £110bn to £1,340bn, while asset values declined by £50bn to £1,590bn.

The funding ratio increased by 6 percentage points to 119 per cent.

PwC’s Adjusted Funding Index, which incorporates strategic changes “available for most pension funds”, including a move away from low-yielding gilt investments to higher return, income-generating assets, and a different approach for the longevity assumption, showed an even higher surplus of £360bn.

According to the adjusted index, liabilties had falled by £90bn to £1,230bn, while the funding ratio was recorded at 129 per cent.

PwC global head of pensions, Raj Mody, highlighted the latest figures as a "stark reminder of what pension schemes are about", emphasising that assets are invested not just for the sake of it, but to cover long-term pension liabilities.

However, Mody also clarified that whilst scheme surpluses are seemingly getting "bigger and bigger" at an aggregate level, the picture is different at an individual level.

He explained: "While more schemes will now be in surplus, perhaps around 3,500 of them, this will range from very large surpluses to those which are more borderline.

“There are about 1,500 schemes still in deficit. For many of those they will likely just need time to eliminate the deficit, as investment returns come good and prudent margins get released, instead of any additional cash payments from their sponsoring company.

“For those with surpluses at the smaller end of the range, it’s important that trustees and sponsors understand how their surplus has been determined, including what approximations have been made. Sometimes there are ‘unknown unknowns’ unless you know where to look.

“The method for tracking a surplus might use an overly simplistic approach over time, presented in a glossy way through a technology portal, but actually some can be pretty rough and ready under the bonnet."

For instance, Mody warned that membership data could be out-of-date, benefit interpretations may not have been independently verified, or there could be a disconnect between the actuarial valuation and member administration systems.

"Financials are volatile and some systems may not be set up to cope well with, for example, much higher than expected inflation," he stated. "All of these issues and others could serve to rebase what looked like a comfortable surplus position into something more balanced.”

Adding to this, PwC pensions actuary, Laura Treece, stressed the need for trustees and sponsors to consider whether they will need to use up some of their surplus if any issues come to light for their scheme.

"For those looking to transfer their pension risk to a third party, we’re seeing a lot of data quality concerns arise in the run up to transactions," she explained.

"If not addressed quickly and managed carefully, dealing with data problems can easily eat up a surplus. For example, we've been brought in to try to salvage a situation where the scheme surplus was originally estimated to be £25m, but now looks like only £5m after some data cleansing.

“Schemes that are looking to transact should plan ahead and identify any discrepancies that could push them off course. This will help them to fix things early on in the process, so they can stay on track to achieve their long-term goals.”

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