The funding surplus of the UK’s 5,300 corporate defined benefit pension schemes dropped from £50bn to £10bn in July, according to PricewaterhouseCoopers (PwC).

The firm’s Pension Funding Index showed that the drop was driven by growth in liability values, which increased by £80bn from June's reading to £1,840bn amid falling gilt yields.

This was partially offset by asset values increasing by £40bn to £1,850bn.

The index has now avoided showing a deficit for six months straight, having gone into surplus for the first time in May following two months of a neutral funding position.

Meanwhile, PwC’s Adjusted Funding Index, which incorporates strategic changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets showed a £190bn surplus for July, down from £230bn in June.

It added that the index had also used a different, more realistic approach for the longevity assumption, noting that The Pensions Regulator had stated in its Annual Funding Statement that assumptions for life expectancy would need careful consideration as a result of the uncertainty brought by Covid-19.

PwC partner and global head of pensions, Raj Mody, explained that leaving longevity assumptions unchanged at the next valuation “could do more harm than good” as it would mean failing to take into account “the latest data”.

He continued: “Where part of the assumptions relate to future long-term forecasting and where it’s as much an estimate as informed by data, it’s even more important not to settle for ‘what you did last time’.

“If trustees and sponsors approached all their actuarial assumptions like that, then pension scheme strategies would end up wildly out of kilter with real-life needs. It’s crucial to make the most informed decision you can at any given time.

“The risk with just sticking with old forecasts is that it could require excess money being paid irreversibly into schemes in the short term, to fund prospective life expectancy improvements which are decades out and may not even happen. This might be appropriate for some schemes, but it’s unlikely to be right for the majority.”

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