DB funding - July 2021: Fall in surplus on back of yield drop

Aggregate funding level drops to 103.5% but number of schemes in deficit rises by 176

Professional Pensions
clock • 6 min read

Every month, several firms issue trackers of the aggregate defined benefit (DB) scheme funding position. Here are the July 2021 estimates on the various measures…


The combined section 179 funding position of UK defined benefit (DB) schemes deteriorated during July but remained in surplus, according to the Pension Protection Fund (PPF).

The compensation scheme's 7800 index reported a £62.4bn overfunding position on aggregate, down £36.6bn compared to the end of June.

While assets had grown by £36.7bn, these were more than offset by a £73.3bn increase in liabilities.

Overall, the funding level dropped by 2.3 percentage points to 103.5%.

PPF chief finance officer and chief actuary Lisa McCrory also highlighted that there was a considerable portion of schemes that remained in deficit, rising by 176 in number in July: "The number of schemes in deficit increased marginally to 2,600, and the total shortfall of these schemes increased by £24.5bn to £142.2bn.

"This increase highlights the ongoing risk to the PPF and how sensitive scheme funding is to yield changes."

She blamed a fall in corporate bond yields for the drop in funding.

The index recorded falls in ten-, 15- and 20-year fixed interest gilt yields of 17 basis points (bps), 20bps and 23bps respectively, as well as a 24bps drop for five-to-15-year index-linked gilt yields.

Conversely, the FTSE All-Share Total Return Index rose by 0.5% over July, and the FTSE All-World Ex-UK Total Return Index was static.

Buck UK head of retirement consulting Vishal Makkar said: "July was another positive month for the schemes following a tumultuous period over the last year, with the aggregate funding position remaining well in surplus. While yields drifted downwards slightly, strong asset returns cancelled out the impact of this,

He the more stable position allowed schemes to focus on other targets, including climate change reporting.

"DB schemes of all sizes should see this is an opportunity to ensure that they are managing their climate risk, making appropriate plans and giving these challenges the attention they deserve."


FTSE 350-sponsored defined benefit (DB) schemes suffered a £19bn increase in their funding shortfall over the course of July, according to Capita.

The consultancy's newly published funding tracker revealed a £45bn accounting deficit for such schemes as of 31 July, with assets amounting to £837bn and liabilities totalling £882bn.

Overall the funding level dropped by 1.9 percentage points to 94.9%, a move which was largely blamed on a fall in corporate bond yields, particularly where schemes were underhedged.

Head of corporate consulting for corporate pensions Tim Rimmer commented: "Many schemes still find themselves tantalisingly close to being fully funded on an accounting basis and sponsors need to consider carefully their next steps at this juncture, given the volatility we have seen in the last 18 months. Trapped surplus can become a real risk for some.

"Sponsors should actively consider ways of de-risking at this time, particularly in the wake of rising inflationary pressure and the large swings in bond yields since the start of the pandemic. Liability management/member options exercises show no sign of slowing down and provide a useful tool in the employer's arsenal to manage pension obligations."


The combined accounting deficit of FTSE 350 defined benefit (DB) schemes rose to £85bn over the course of July, according to Mercer.

The global consultancy's monthly index recorded the £13bn increase in the shortfall as a growth in assets was more than offset by a surge in liabilities.

By the end of the month, assets had risen by £29bn to £843bn, while liabilities grew by £42bn to £928bn.

As a result, the overall funding level dropped by 1.1 percentage points to 90.8%.

Mercer said the movement was largely driven by a drop in corporate bond yields and a rise in market expectations for future inflation.

UK wealth trustee leader Tess Page said: "Amid the cautious re-opening of the UK to something approaching ‘normal life', the spotlight is still on the contagious delta variant and its impact on re-opening plans and economic growth around the world.

"July has been a reminder that funding levels can go down as well as up, and for schemes that have not hedged their risks there remains high volatility. In recent months some schemes have locked into gains in order to get ahead on their long-term journey plans - trustees and employers should therefore be vigilant to such opportunities and prepare for how they will respond to future upside."


Pension scheme funding positions fell back slightly over the course of July, with estimated scheme-specific funding ratios dropping by 2.3 percentage points to 100.5.

The professional services firm recorded a combined surplus of £10bn - a fall of £40bn compared to the end of June - after assets grew to £1.85trn and liabilities rose to £1.84trn.

The professional services firm recorded said liability values increased by £80bn to £1.84trn over July, driven by falling gilt yields. Asset values also increased to £1.85trn to offset some of this, and as a result the overall funding position continues to show a surplus of £10bn based on schemes' own measures, down from £50bn last month.

PwC said this now makes for six months of aggregate surplus for the UKs DB scheme universe.

The firm's adjusted funding index - which incorporates strategic changes to higher-return, income-generating assets as well as a "more realistic" approach to longevity assumptions - also showed a fall in surplus, from £230bn last month to £190bn at the end of this month.

PwC said assumptions for life expectancy are an area that sponsors and trustees might want to pay particular attention to - particularly in light of The Pensions Regulator's focus on the area in its annual funding statement.

The regulator said schemes should look at the issue as a result of the uncertainty that Covid-19 brings - suggesting that one way to deal with this uncertainty might be to retain an assumption similar to previous valuations and let any positive experience unfold over future valuations.

PwC partner and global head of pensions Raj Mody said: "It might sound easier for schemes to leave the longevity assumption unchanged at their next valuation, but it could do more harm than good.

"Long-term life expectancies have always been hard to predict, and schemes make estimates using the most up-to-date information they have. Keeping the same longevity assumption would mean not taking into account the latest data. It is better for schemes to reassess their longevity assumptions based on the latest evidence available - modern analytical tools and techniques allow this."

Mody added: "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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