There has been a significant improvement in the net funding position of defined benefit (DB) pension schemes in the UK amid a slight decline in asset allocations to bonds and equities, the Pension Protection Fund (PPF) has found.

Its annual Purple Book showed that the net funding position of the schemes it protects, on a section 179 basis, rose from a surplus of £193bn in March 2022 to £358.9bn in March 2023, with more than 80 per cent of schemes in surplus.

The PPF primarily attributed the funding improvement in 2022/23 to rising gilt yields driving down liability values.

Its report highlighted a continued year-on-year acceleration in the improvement of funding levels, which have risen from a surplus of £47bn in March 2021.

The aggregate funding ratio also increased during this period, from 102.8 per cent in 2021 and 113.1 per cent in 2022 to 134 per cent in 2023.

The number of DB schemes fell slightly year-on-year, from 5,131 to 5,063, due to schemes winding up, merging, or claiming on the PPF.

It found that the DB scheme universe remained “highly fragmented”, with schemes with fewer than 1,000 members making up 80 per cent of schemes but only around 10 per cent of total assets, liabilities and members.

While schemes have continued to invest a large proportion (69 per cent) of their assets in bonds, this was a slight decrease from the 71.6 per cent observed in March 2022.

Within bonds, the largest shift was seen in corporate bonds, which rose from 30.2 per cent to 36.5 per cent of bond allocations, while index-linked bonds fell from 47.8 per cent to 44.1 per cent and government-fixed bonds declined from 22 per cent to 19.5 per cent.

A slight decline in the proportion of assets invested in equities was also observed, falling from 19.5 per cent to 18 per cent over the year.

The largest shift within equities was the increase in allocations to private equity, which rose from 21.5 per cent to 29.5 per cent of equity investments, while investments in UK-quoted equity fell from 9.9 per cent to a record low of 7.6 per cent and overseas equities decreased from 68.6 per cent to 62.8 per cent.

Despite the fall, the split between bonds and equities has been broadly stable since March 2020, the PPF noted.

“Over the last year, there has been a material improvement in the aggregate funding position of the schemes we protect,” commented PPF chief actuary and interim chief financial officer, Shalin Bhagwan.

“Just as the PPF has entered a maturing phase, the wider DB universe looks to be similarly moving into a new phase with many schemes accelerating towards buyout funding levels.

“This will likely further sharpen the focus on endgames and the options available to schemes.”

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