The debate around how to best utilise defined benefit (DB) pension surpluses is “intensifying”, PwC has said, after its latest analysis revealed that the aggregate funding level of UK DB schemes reached a record high in May.

PwC’s Low Reliance Index, which assumes schemes invest in low-risk, income-generating assets like bonds, revealed that the aggregate surplus grew by £10bn in May to a record £400bn, with assets of £1,440bn and liabilities of £1,040bn, resulting in a funding ratio of 138 per cent.

Meanwhile, the firm’s Buyout Index showed that DB schemes’ surplus rose by £10bn to £255bn, based on £1,440bn of assets and £1,185bn of liabilities, with a funding ratio of 122 per cent.

However, PwC head of pensions funding and transformation, John Dunn, said that, from the sponsor’s perspective, the surplus is often “trapped in the trust”, arguing that new rules are needed to allow surplus to be released while the scheme is ongoing.

“There are further barriers to giving surplus to members by increasing pensions, through accounting rules that determine how discretionary pension increases are treated in the sponsor’s books,” Dunn continued.

Adding to this, PwC head of pensions financial reporting and partner, Brian Peters, stressed that using surplus to grant members additional pension would typically result in a profit and loss (P&L) charge for the sponsor under current accounting standards.

“In our discussions with sponsors, any P&L hit is often a complete red line, which can take additional discretionary pension increases off the table, even if they are paid out of the pension scheme’s surplus assets,” Peters said.

“The accounting standards setters are unlikely to change established rules and practice so companies will need to balance the accounting treatment of granting additional benefits to scheme members against the extent to which the company and members will also benefit from the release of surplus.

“Understanding and communicating the potential impact on the P&L will be key to helping companies assess the merits of different ways of using surplus that has built up in their pension scheme.”

---