There is a “clear trend” in private sector defined benefit (DB) pension schemes halting sponsor contributions in light of improved funding levels, PwC has observed.

According to PwC’s Buyout Index, DB schemes’ surplus rose by £5bn in April to £245bn, with assets of £1,405bn and liabilities of £1,160bn, resulting in a funding ratio of 121 per cent.

Meanwhile, according to the firm’s Low Reliance Index, which assumes schemes invest in low-risk, income-generating assets, the surplus grew by £5bn to £390bn, with assets of £1,405bn and liabilities of £1,015bn, and a funding ratio of 138 per cent.

PwC noted that schemes still receiving contributions from their sponsor while already having enough money to achieve the scheme’s long-term objectives could cause ‘headaches’ in the future, such as deciding how excess surplus should be spent or overcoming hurdles to return it to the sponsor after a tax charge.

“In many cases, sponsors and trustees have seen sustained or increasing surpluses in their pension schemes in recent months,” commented PwC UK head of pensions funding and transformation, John Dunn.

“For schemes where the sponsor is still making contributions, if no action is taken these will typically continue to be paid until they’re reassessed at the next triennial valuation. The question is whether that’s the right thing to do, for both the scheme and the sponsor.”

For most schemes halting sponsor contributions, the costs of running the scheme will be paid for with the surplus, while for active schemes it could also include the sponsor’s share of the cost of those benefits, PwC noted.

The firm said this reduced the risk of overfunding while ensuring that schemes are still funded prudently, and if trustees required further security, separate vehicles could be used to keep some funds from the sponsor aside.

However, while PwC had observed a trend towards using surpluses to meet costs in private sector DB schemes, it had not yet seen the same trend in funded public sector schemes.

“The Local Government Pension Scheme has built up a significant surplus over the last couple of years, which has yet to be used in any meaningful way to subsidise council’s costs and reduce the pension contribution burden on council workers,” said PwC pensions partner, Gareth Henty.

“Contributions are not due to be formally recalculated until the next triennial valuation in 2025, and any changes would only be effective from 2026.

“It will be interesting to see whether well-funded local government schemes will follow the private sector in reducing (or even stopping) contributions - particularly given budget constraints among local authorities.”

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