The UK's 5,000-plus defined benefit (DB) pension schemes have remained in a strong solvency position, according to latest figures from PwC.

PwC's recently introduced Buyout Index, which tracks the position of the UK’s DB schemes against the estimated cost of an insurance buyout, revealed that the DB schemes have sufficient assets to buyout, despite the recent woes experienced by liability-driven investment (LDI) DB strategies.

Although the estimated average buyout cost rose slightly in October, the index showed that increases in asset values have resulted in the index maintaining a broadly unchanged funding level, with a surplus of £170bn.

PwC's other new benchmark, the Low Reliance Index, which uses a discount rate assumption of gilt yields plus 0.5 per cent per annum, showed that UK DB schemes have a surplus of £330bn.

The index assumes a low-risk income-generating investment strategy, where the scheme would be unlikely to call on the sponsor for further funding.

Commenting on the findings, PwC's head of pensions funding and transformation, John Dunn, noted that when comparing asset values to the expected liabilities UK DB schemes, on a collective basis, schemes have continued to remain very well-funded despite volatile markets.

“The recent improvements in funding levels of UK DB schemes have been driven, in the main, by increases in long-term bond yields during 2022 — which were at first steady, then rapid," he says.

"This trend could change but, in the short term at least, many pension schemes have an opportunity to lock in an improved funding position.

"From an investment perspective, we see this increasing the trend towards investment strategies with lower return requirements, lower complexity and therefore cost, and a greater focus on delivering the cash flows needed to pay pensions.”

Adding to this, PwC's head of investment oversight, Keira-Marie Ramnath, argued that it is now "critical" for schemes to that took rapid action maintain liquidity to properly understand the impact this has had on funding and reset their investment strategies accordingly.

"We expect schemes to re-evaluate investment strategies and governance models," she continued. "In tandem, many investment providers will re-evaluate their business models in the months ahead."

“For trustees looking to give greater certainty to members, there is a win-win investment approach available — invest to deliver the cash flows needed to pay pensions.

"This means investment portfolios with lower risk, lower cost, lower complexity and less LDI leverage. These portfolios are now even more attractive given improved funding levels and the regulatory direction of travel. ”

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