DB schemes’ funding position falls for first time in 6 months

The aggregate surplus of defined benefit (DB) pension schemes in the UK fell for the first time in six months during July, the Pension Protection Fund’s (PPF) 7800 Index has revealed.

According to the index, the surplus fell from £267.9bn at the end of June to £254.3bn at the end of July, while the funding ratio decreased from 120.1 per cent to 118.2 per cent over the same period.

Liabilities increased from £1,330.8bn to £1,399.4bn, although this was partially offset by assets also rising, from £1,598.7bn to £1,653.7bn.

There were 1,490 schemes in deficit at the end of July, up from 1,398 at the end of June, and 3,725 were in surplus.

The aggregate deficit of the schemes in deficit was £29.8bn, up from £25.3bn a month prior.

“For the first time in six months, we’ve seen the funding position for the 5,215 schemes under our protection decline,” commented PPF chief finance officer and chief actuary, Lisa McCrory.

“This decline is the result of a fall in bond yields as markets anticipate the recent central bank tightening cycles may be drawing to a close.

“While the aggregate surplus for the PPF 7800 Index remains positive, the economic outlook remains uncertain with the risk of an uptick in the rate of corporate insolvencies.

“We encourage trustees, even if their funding position is strong, to have contingency planning for employer insolvency in place.”

Buck UK head of retirement consulting, Vishal Makkar, warned that despite the “relative stability” in funding levels, it’s “not all plain sailing for trustees".

“We’ve seen further recent rises in both inflation figures and the Bank of England’s base rate, as concerns about the cost of living dominate the news agenda,” he continued.

“The uncertain economic climate is just one cause for concern though and many trustees, particularly at smaller schemes, may have worries about upcoming regulatory changes too.

“The latest consultation on DB funding, which was launched by the DWP at the end of July, is a welcome sign for pension schemes that the new DB funding regime is finally starting to come together after a series of pandemic-related delays.

“Trustees at smaller schemes may, however, have concerns about how these changes could increase the complexity and weight of regulation they face. Ultimately, we’ll have to wait until we see the full guidance from the regulator before we can know for sure exactly how schemes will be affected by the rules.”

Broadstone senior actuarial director, Iain Tait, added that despite the dip in the overall funding position, funding levels for DB schemes are still in a "healthy position", with an aggregate surplus around four times higher than a year ago.

"The significant improvements in funding levels over the last year, driven by rising yields, should continue to be seen as a really loud call for action by both scheme trustees and sponsors," he continued.

"For many, full buyout funding will be much closer than at previous valuations, or even above 100 per cent.

“For those with endgame plans already in place it’s time to re-evaluate objectives, funding levels and consider further investment de-risking. Sponsors should, even more so than previously, be wary of the risk of trapped surpluses and be considering their options to manage this risk, such as the use of escrow accounts.

"For those with no plans in place potential opportunities are being missed.”

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