Defined benefit (DB) pension schemes have remained out of overall deficit over the past 12 months, according to PwC’s Trustee Funding Index.

The index revealed that the aggregate surplus halved in January 2022 to £30bn, according to schemes’ own measures.

The fall was driven by assets declining by £80bn to £1,780bn during the month, although this was partially offset by liabilities also declining, by £50bn to £1,750bn.

The funding ratio fell by 1 percentage point to 102 per cent.

January marked the 12th month in a row that schemes remained out of deficit, with the last time that schemes were in overall deficit being January 2021 when the overall deficit was £120bn.

PwC’s Adjusted Funding Index, which incorporates strategic changes available for most pension schemes, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes, showed a surplus of £200bn.

His was also down by £30bn compared to the previous month, while the funding ratio according to the Adjusted Funding Index fell by 1 percentage point to 113 per cent.

PwC global head of pensions, Raj Mody, described the year out of deficit as an “unprecedented run” and that, although inflation had hit a 30-year high, it was likely that the surplus trend would be sustained.

“The inflation situation may even generate a greater surplus,” he continued.

“Although pension scheme benefits are linked to inflation, the increases are typically subject to a cap. In most schemes this cap is lower than the current rate of inflation, so scheme liabilities are not fully exposed to inflation volatility.

“This will give some protection to the funding health of most schemes, and potentially see even more surplus created as inflation tensions eventually subside.

“Running a pension scheme with significant surplus can cause challenges for trustees. Their powers are not always well designed to deal with such situations.

“There can be pressure to spend some of the surplus on improving member benefits, which might sound appealing for members, but can be difficult for trustees to act fairly between different categories of membership. Surpluses can also lead to investment and tax inefficiencies.”

PwC pensions actuary, Laura Treece, added: “Many well-funded schemes are now on the brink of being able to take action to secure members’ benefits for good. But their sponsors are increasingly concerned about putting in more cash than is needed to do so.

“They know that if they overshoot the amount required it will be hard to get the excess back. In this new world of persistent surpluses, trustees and sponsors need to re-evaluate the best way of managing their schemes towards their long-term goals.

“Even if the ultimate target is some kind of insurance buyout, instead of continuing to pay cash into an already well-funded scheme, sponsors could pay this into a separate funding vehicle. This money can be used to support the pension scheme, but won’t be tied up if not all of it is needed. It would help avoid future stranded surplus, and the associated loss of value.”

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