The aggregate surplus of defined benefit (DB) pension schemes rose to £446.1bn at the end of July 2023, the latest Pension Protection Fund (PPF) 7800 Index has revealed, marking a further improvement on the record high seen in June.

This was based on total assets of £1,407.5bn and £961.4bn in total liabilities, with the average funding ratio for UK DB schemes also increasing from 145.8 per cent at the end of June 2023 to 146.4 per cent at the end of July.

The index also demonstrated the year-on-year improvements seen, as this compared to a funding ratio of 119.6 per cent in July 2022, and an aggregate funding surplus of £262bn.

The number of schemes in deficit also continued to fall in July, as the index showed that there were 458 schemes in deficit, down from 479 in June, and 4,673 schemes in surplus.

In line with this fall, the deficit of the schemes in deficit at the end of July 2023 was £2.2bn, down from £2.3bn at the end of June 2023, while the surplus for schemes in surplus grew from £439.3bn to £448.3bn.

Commenting on the latest update, PPF chief actuary, Shalin Bhagwan, said: “Despite a softening of inflation during July, market interest rates were broadly unchanged, which has resulted in little movement in estimated scheme liabilities this month.

"Meanwhile, optimism that developed economies would avoid recession grew and growth-sensitive assets like equities saw strong returns, leading to an improvement in estimated scheme assets.

“As a result of these developments, the momentum driving improved funding levels over the past few months has been maintained, with the funding ratio increasing by 0.6 percentage points to 146.4 per cent.”

Adding to this, Broadstone senior actuarial director, Jaime Norman, suggested that “we are now entering a new phase of the current economic cycle which presents opportunities and challenges for pension schemes and their trustees”.

Norman continued: “Persistent inflation is starting to come down and economists forecast that we are nearing the end of the Bank of England’s rate hiking.

"Growth assets delivered positive performance through the month as the market becomes increasingly optimistic that a recession is looking less likely as inflation starts to come under control.

“The second half of the year is therefore a crucial time for pension scheme trustees to take stock, particularly given many will have significant improvements in their funding position over the past 18 months.

"Their job now will be capitalising on the market environment either by rapidly pursuing their end-game objectives or assessing the suitability of their investment strategy to the current economic situation.

“In such a congested market, trustees will also need to ensure their data and administration is in good order to make their scheme as attractive as possible to insurers.”

Analysis from XPS Pensions Group also showed further funding improvements among UK DB pension schemes, estimating that the aggregate funding level increased to 111 per cent over the month of July.

According to XPS Pensions’ tracker, the aggregate surplus of UK pension schemes stood at approximately £145bn as of 31 July 2023, after aggregate scheme assets rose to £1,430bn, while unexpectedly low inflation figures announced in July saw aggregate scheme liabilities remain at a similar level at £1,285bn.

Commenting on the update, XPS Pensions Group senior consultant, Charlotte Jones, noted that "despite the UK facing significant economic challenges, DB pension schemes have remained robust and aggregate funding has increased".

"Long-term gilt yields have fallen by around 0.13 per cent since the encouraging inflation announcement in the middle of July, with expectations of future interest rate rises being pared back," she continued.

“The Bank of England’s decision to raise interest rates by 0.25 per cent last week confirms this belief, with many analysts previously expecting a larger, 0.5 per cent rise would be required.

"However, given the uncertain nature of future inflation and interest rates, schemes should consider their hedging levels to ensure any positive funding positions are locked-in.”

Adding to this, Buck head of retirement consulting, Vishal Makkar, pointed out that, despite schemes remaining in a healthy position, it hasn't necessarily been a quiet start to the summer for trustees.

“The Mansion House reforms, announced by the Chancellor in July, represent a significant development for the industry," Makkar continued.

“Throughout this process, trustees have been invited to give their thoughts, via a number of different consultations. This even extends to the ongoing consultation to determine whether trustees currently have the knowledge and skills they need.

"This is a positive and collaborative approach from the Department for Work and Pensions and, by contributing to these consultations, trustees have the power to shape the future of the DB pensions landscape.

"This is an important opportunity for schemes and one that comes at a pivotal moment in the future of the industry – it will likely keep many trustees busy over the summer.”

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