Defined Benefit (DB) pension schemes are improving their funding levels alongside de-risking investment strategies, according to research from PwC.

The PwC annual Pension Scheme Funding Survey, has revealed that over half (51 per cent) of DB schemes surveyed have improved their funding position in comparison to 2018, with 80 per cent of schemes reporting a funding deficit, down from 83 per cent.

The survey, which has run annually for the last 10 years, examined responses from 245 schemes, representing over £250bn of liabilities.

While 9 per cent of schemes reported that their funding levels were broadly unchanged, 40 per cent of schemes stated that their position had worsened.

Where scheme deficit had worsened over the year, PwC found that 44 per cent of schemes had deferred their target date for full funding by three years or more.

While the average recovery length for the schemes surveyed remained broadly consistent with PWC’s 2018 report, at around nine years, this remains longer than the average reported in The Pension Regulator’s (TPR) March 2019 scheme funding statistics (seven years).

Commenting on the results, PwC pensions partner, Paul Kitson, said: "Indeed, schemes seem to be falling into two camps; ‘the haves’ - those that have done well and have been able to reduce the length of their recovery plan at this valuation compared to their previous one, and the ‘have nots’ - those that have had to increase their recovery plan length, in some cases significantly.

“This split introduces different challenges for each group. For the ‘haves’ the challenge is sponsors becoming concerned about trapped surplus. So we are likely to see an increased use of contingent asset or escrow and reservoir trusts being used which enables sponsors’ money or assets to be paid but into a vehicle that allows the sponsor to get it back if it turns out not to be needed.

"The other challenge for the well-funded schemes is how to achieve an efficient end game in an increasingly crowded market and with increasingly diverse options.

“For the ‘have nots’ the difficulty is how to get better funded given limitations on employer affordability and an outlook of continued uncertainty.”

The survey also found that the average single equivalent discount rate across all liabilities is now 0.8 per cent per annum above gilt yields, with nearly six out of 10 (58 per cent) of schemes now adopting a discount rate which reflects the expected de-risking of scheme aspects as membership matures.

Kitson added: "This is similar to the best estimate return on a low risk cashflow matched investment portfolio. Therefore, once current recovery plans are paid, this signals UK pension schemes reaching a state of low sponsor dependency for the first time in recent history.

"However, it’s worth noting that four out of five schemes still have a deficit on this measure and of course market conditions could move against pension schemes before recovery plans are paid.”

The report also showed a trend of schemes adopting mortality assumptions that project lower life expectancies than previous projections, reflecting broader shifts in life expectancy.

Kitson concluded: “It will be important to debate over the coming months and years, what impact the continued funding drag of legacy DB is having on what companies are able to offer their younger members accruing DC. Without change, as highlighted in the recent G30 report, there is a real risk of significant pension poverty for those with only DC pensions following in the wake of the DB generation.”

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