DB funding - August 2021: Surplus rises with bond yields

PPF index finds a 104.7% funding level, although 2,483 schemes remain in deficit

James Phillips
clock • 5 min read

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

PPF ­7800

The UK's defined benefit (DB) schemes experienced a £20.8bn rise in their funding surplus over the course of August, according to the Pension Protection Fund (PPF).

The compensation scheme's monthly 7800 index recorded an £83.2bn overfunding status at the end of the month, having risen from £62.4bn in July.

Assets grew by £6.6bn to £1,856bn while liabilities fell by £14.2bn to £1,773.1bn.

The overall funding level rose by 1.2 percentage points to 104.7%.

PPF chief finance officer and chief actuary Lisa McCrory commented: "This change was caused by a rise in bond yields coupled with an increase in the value of equities."

Yields on 10-, 15- and 20-year fixed-interest gilts all rose by seven basis points (bps) over the month, while the 5-to-15-year index-linked gilt yield fell by 1bp. The FTSE All-Share Total Return Index and FTSE All-World Ex-UK Total Return Index rose by 2.7% and 3.6% respectively.

The number of schemes in deficit fell by 117, with their total shortfall dropping by £12bn.

XPS Pensions

The aggregate scheme deficit dropped by £18bn over the course of August on a long-term funding target (LTFT), according to a new XPS Pensions tracker.

Using a discount rate of gilts plus 0.5% to measure liabilities, the consultancy estimated a total scheme deficit of £314bn at the end of the month. This was based on assets of £1,918bn and £2,232bn. The overall funding level improved from 85.1% to 85.9%.

The XPS DB:UK Funding Watch uses the firm's own data pool, as well as information from The Pensions Regulator (TPR) and the Pension Protection Fund's 7800 Index. It also allows real-time monitoring of changes and analysis.

Funding positions continue to be affected by the rise in gilt yields, which have increased by 20 basis points over the last year, XPS said, but may remain exposed to other risks.

Senior investment consultant Felix Currell explained: "Pension schemes have continued to benefit from strong equity markets, which have generally managed to shrug off concerns over new Covid variants.

"With the Organisation of Economic Co-operation and Development (OECD) revising up its economic growth forecast for 2021 that optimism is set to continue.

"However, concerns remain over the prospect of increasing inflation, a tighter labour market and increasing input costs, which has led to XPS reducing our central investment return expectations. So pension schemes will be relying on the health of the wider economy to reduce the time taken to reach their targets."

The index also predicts the average scheme is around 12 years away from reaching their LTFT, based on a combination of investment returns and current cash contributions to 2024/25. If such contributions continued, at a cost of around £80bn, the timeframe could be reduced by five years, XPS said.

Senior consultant Charlotte Jones commented: "TPR encourages schemes to set an LTFT. This is seen to be good practice and will help schemes prepare to comply with the requirements of the Pension Schemes Act 2021.

"Schemes will need to work with their sponsors over the coming months to agree an appropriate target and how they plan to achieve it, whilst working collaboratively to balance the targeted level of investment returns versus any increase in cash funding. As an alternative, we may see employers and trustees reconsider investment strategies, contingent support and member option exercises as an alternative to cash to mitigate the impact."


The aggregate scheme surplus doubled to £20bn on a scheme-specific measure over the course of August, according to PwC.

The professional services firm's current funding index recorded the increase in overfunding as the value of liabilities dropped by £10bn to £1,830bn while assets remained static at £1,850bn.

The funding level also increased by 60 basis points (bps) to 101.1%.

On its adjusted funding basis - which incorporates strategic changes to higher-return, income-generating assets as well as a "more realistic" approach to longevity assumptions - the surplus also increased by £10bn to £200bn, with liabilities recorded at £1,650bn. On this basis, the funding level rose by 70bps to 112.1%.

Pensions actuary Emma Morton said it was important that schemes were not "too prudent", noting the potential issue of trapped surpluses.

She said: "It's far more common for sponsors to pay money into a scheme, than it is to get that money back. Sponsors and trustees should keep this asymmetry in mind when funding schemes.

"If the valuation was carried out at a date when markets made the funding position look particularly bad, and the funding position has since improved, these improvements should be taken into account when deciding how much cash the sponsor should pay into the scheme."


Challenges loom for FTSE 350 pension schemes amid a small rise in their funding deficit on an accounting basis, according to Mercer.

The consultancy's monthly funding index recorded a £2bn rise in the shortfall, which hit £87bn at the end of August.

While assets had risen by £4bn to £847bn, liabilities rose slightly faster by £6bn to £934bn.

The funding level therefore dropped 10bps to 90.7%.

UK wealth trustee leader Tess Page commented: "We've seen strong economic growth in recent months, but looking ahead the global economy faces challenges - Covid is back on the rise in many regions, and in the UK the winding down of government support may weigh on growth.

"The last month saw fairly small changes to aggregate funding levels, but the course ahead could well be a choppy one. Schemes with clear integrated risk management strategies will be well-prepared for the future."

James Phillips
Author spotlight

James Phillips

Professional Pensions journalist from 2016-2022

More on Defined Benefit

Employer 'proactivity' needed to avoid trapped surplus

Employer 'proactivity' needed to avoid trapped surplus

Hymans Robertson says sponsors need plans to ensure efficient utilisation of surplus

Jasmine Urquhart
clock 22 May 2024 • 1 min read
UK DB profit warnings fall for first time in a year

UK DB profit warnings fall for first time in a year

EY-Parthenon report shows 18 profit warnings were issued by UK sponsors with a DB scheme

Holly Roach
clock 16 May 2024 • 2 min read
Professional Pensions' DB Funding Index

Professional Pensions' DB Funding Index

How the funding of defined benefit pension schemes is changing

Jonathan Stapleton
clock 14 May 2024 • 1 min read