DB funding - October 2021: Yields drive down surplus

Small deterioration in funding level recorded by PPF 7800 Index

James Phillips
clock • 6 min read

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

PPF 7800

Defined benefit (DB) schemes experienced a marginal drop in their aggregate surplus of £5.6bn on a section 179 basis over the course of October, says the Pension Protection Fund (PPF).

At the end of the month, the combined surplus of the 5,318 schemes included in the index was estimated to be £103.2bn, down from £108.8bn.

While assets rose by £43.1bn to £1,844bn, they were outpaced by a £48.7bn increase in the value of liabilities, which hit £1,740.8bn. The overall funding level decreased by 50 basis points (bps) to 105.9%.

Although the position has deteriorated slightly, it is a far cry from the £126bn deficit recorded at the same point last year.

The number of schemes in deficit at the end of October was estimated to be 19 higher, at 2,402, compared to September, with their aggregate funding shortfall rising by £3.2bn to £221.4bn.

For October, yields on 10-, 15- and 20-year fixed interest gilts were recorded at 0bps, -13bps, and -20bps respectively, while the yield on a 5-to-15-year index-linked gilt yield was -17bps. The FTSE All-Share Total Return and FTSE All-World Ex-UK Total Return indices saw 1.8% and 3.4% returns.

PPF chief finance officer and chief actuary Lisa McCrory said: "While this marginal decline in the aggregate surplus is mainly due to a decrease in bond yields, it's a reminder of the ongoing volatility in scheme funding levels and the risk the schemes we protect pose on our reserves and funding position."

Buck head of retirement consulting Vishal Makkar said: "Trustees were given further breathing space by the Autumn Budget, which provided little in the way of pensions policy announcements.

"Schemes should take advantage of this period of policy consistency and relative funding security to invest time and energy into other issues and more long-term projects."

He said these included concerns around inflation, interest rates, and ESG obligations, as well as wider admin requirements.


Defined benefit (DB) schemes saw a £34bn rise in their deficit between 1 and 31 October on a long-term funding target basis, says XPS Pensions.

The fund's DB:UK tracker recorded a £319bn funding deficit when calculated on a discount rate of gilts plus 0.5%.

Compared to 30 September, assets rose by £63bn to £1,912bn, while liabilities rose by £100bn to £2,231bn. Consequently the funding level dropped by 1.1 percentage points to 85.7%.

XPS said this was largely driven by falls in long-term gilt yields after the Debt Management Office (DMO) cancelled a large number of the remaining auctions for 2021/22.

XPS Investment senior consultant Felix Currell said: "This announcement from the DMO serves as a reminder that supply and demand factors play as much of a role in longer-term yield movement as economic factors.

"It is important trustees understand the unpredictability of the risks carried by their scheme, at a time where many individuals were expecting yields to move in the opposite direction."

The firm estimated this meant that the average time to reach long-term targets had extended by around 2.5 years over the course of the month, hitting 13 years. This is based on the proposed revision of the DB funding code from The Pensions Regulator, including allowances for investment returns and cash contributions.

Partner Adam Gillespie added: "While hedging strategies are commonplace, there is a wide range in how these are executed and how much protection is offered.

"For example, there are many reasons why trustees may want to consider implementing hedging targets above the level of technical provisions, for example to protect their schemes against the risks faced in reaching their long-term objectives.

"A hedging strategy should form a key part of setting an appropriate journey plan to give trustees a smoother path to their long-term goal such as buy-out or run-off."


The accounting deficit of FTSE 350-sponsored defined benefit (DB) schemes fell below 90% in October for the first time since last July, says Mercer.

The consultancy's funding index recorded a £6bn rise in the overall deficit, which hit £94bn at the end of October as corporate bond yields fell by around 23 basis points (bps) to 1.79%.

While asset values rose by £30bn to £837bn, a £36bn increase in liabilities to £895bn drove the funding deterioration.

The overall funding level dropped by 30bps to 89.9%.

Mercer UK wealth trustee leader Tess Page said: "This month's data reinforces the challenges still faced by many schemes despite positive momentum on the asset side. Inflation remains above the Bank of England target, and implied future inflation is also elevated.  

"In a week when focus is rightly on climate change, this is a timely reminder that interest rates and inflation remain top of the risk list for many pension schemes. Along with planning their climate change risk strategy, trustees should consider reviewing their approach to hedging assets and liabilities to ensure their strategy remains optimal."


Pension scheme funding positions improved by 60 basis points (bps) to 101.7% as assets rose while liabilities remained stable, says PwC.

The consultancy's funding index measured a £30bn surplus on a scheme-specific measure at the end of October, up £10bn compared to September, with assets rising to £1,820bn.

It is the ninth month that PwC's index has recorded a surplus.

Meanwhile, on its adjusted funding basis - which incorporates strategic changes to higher-return, income-generating assets and an altered approach to longevity assumptions - the surplus also increased by £10bn to £200bn. On this basis, the funding level rose by 60bps to 112.3%.

Global head of pensions Raj Mody said: "As funding positions continue to improve, pension schemes should make sure that their asset strategy will stand them in good stead in the future. For example, climate risk poses a threat to future returns on certain types of investment.

"In light of COP26 and climate-related disclosures, there is ever increasing focus in this area. More sponsors and pension fund trustees are looking at how they can target net zero for their pension schemes as well as in their business operations. Inevitably given the practical complications and supply constraints, only a minority have addressed all the issues."

A recent PwC event found that nine in ten pension fund representatives had not either considered the risks and opportunities of climate change or taken any practical action to address it.

Pensions actuary Laura Treece said trustees had "complex issues" to work through, adding: "If the industry doesn't collectively take action, economic growth and future returns for every pension fund are at stake. Not only that, schemes could miss out on opportunities to optimise returns - sustainable assets are well placed to provide future real returns as the UK works towards net zero.

"Those pension funds looking to transfer to an insurance company might also find that ‘green' assets are more desirable, which may help them secure members' benefits more quickly."

James Phillips
Author spotlight

James Phillips

Professional Pensions journalist from 2016-2022

More on Defined Benefit

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
Partner Insight: Using DB surplus to support DC provision

Partner Insight: Using DB surplus to support DC provision

Aggregate defined benefit (DB) funding levels have improved to over 130% resulting in over 80% of DB schemes now being in surplus.*

Yassin Isman, Associate Partner, Aon
clock 13 May 2024 • 4 min read