The collective funding level of UK defined benefit (DB) pension schemes reached a record surplus of £265bn in January, after an increase in long-term gilt yields cut the estimated cost for schemes to reach buyout, PwC’s Buyout Index has revealed.

The PwC Low Reliance Index, which tracks the position of the UK’s DB schemes based on a low-risk income-generating investment strategy, also showed a record surplus of £385bn.

Reflecting on the recent movements, PwC noted that, with wavering gilt markets and economic uncertainty over the last 12 months, schemes have generally been more conservative in their investment strategies.

However, PwC head of pensions funding and transformation, John Dunn, pointed out that pension schemes’ conservative bond-based investment strategies effectively hedged out most of the movements in the liability side of their balance sheets.

”Global stock markets were up in the 12 months to December with the US market returning almost 25 per cent," he continued.

"UK pension schemes missed out on much of this return because they have to balance the level of risk taken with the sponsor’s ability to absorb it."

In a world where UK pension schemes invest only for growth and to generate surpluses for members and sponsors, Dunn estimated that the surplus at the end of 2023 would have been £300bn higher based on those US market returns.

"Whether this is a missed opportunity or fool’s gold really depends on the ability of the pension scheme and its sponsor to handle the year in which asset values fell by 25 per cent whilst still paying pensions," he clarified.

PwC also acknowledged that the unprecedented levels of funding, as well as the recently announced DB Funding Regulations, have led to an increasing number of schemes considering higher risk investment strategies.

“The government finalised the new funding regulations last week, announcing that the new rules are ‘explicitly more accommodating of appropriate risk taking where it is supportable’," PwC senior pensions specialist, Laura Treece, explained.

“The new rules are intended to allow even mature pension schemes to invest 20 per cent to 30 per cent of their core assets for growth plus the surplus assets - potentially unlocking £700bn of assets for productive investment decades into the future. This could boost not only pension schemes’ asset returns but also UK economic growth.”

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