DB funding tracker — April 2022: PPF ratio surge

PPF

The aggregate surplus of the 5,215 defined benefit (DB) schemes in the PPF7800 is estimated to have increased by £29.8bn during April on a Pension Protection Fund (PPF) compensation basis, the lifeboat fund says.

At the end of last month, the combined surplus was recorded at £206.2bn on a section 179 basis, with assets and liabilities falling by 2.5% and 4.7% respectively.

Assets totalled £1,678.0bn and liabilities amounted to £1,471.8bn, compared to £1,721.5bn and £1,545.1bn at the end of March. Overall, the funding ratio improved from 111.4% to 114.0%.

PPF chief finance officer and chief actuary Lisa McCrory said: "Last month's aggregated funding ratio for the schemes under our protection continued to rise to 114.0%. The increase is mainly due to the ongoing surge in bond yields primarily driven by central banks combatting the rising inflation. It'll be interesting to see what impact the US and UK rate moves will have on the 7800 index next month when coupled with ongoing Covid lockdowns in China and further heightened economic sanctions on Russia."

Capita

Capita's FTSE 350 scheme funding tracker found a 2.4 percentage point improvement in funding levels, which grew to 98.1% at the end of the month.

The consultancy said liabilities had fallen by £59bn to £727bn but said assets had fallen less, by £39bn to £713bn. This meant the overall deficit decreased to £14bn.

Capita senior consultant Lee Wilson commented: "Funding levels have improved over the month primarily because of the sharp rise in corporate bond yields. However, sponsors should be wary of the current volatility of the market and in particular, the risks that high levels of short-term inflation are currently presenting.

"As schemes approach full funding sponsors should switch their focus to end game planning, finding the most efficient route of dealing with the scheme in the long term."

XPS

On a long-term funding target basis, pension scheme deficits have decreased by c.£33bn over the month to 27 April 2022, according to XPS Pension Group's DB:UK Tracker.

The consultant said the change was primarily driven by a further rise in gilt yields as well as a fall in long term inflation expectations.

Based on assets of £1,705bn and liabilities of £1,946bn, XPS said the average funding level of UK pension schemes on a long-term target basis was 87.6% as of 27 April 2022. XPS estimated that at the end of  April 2022 the average pension scheme would need an additional £24,000 per member to ensure it can pay their pensions into the long-term.

It said the improvement in funding levels over March was largely due to a further rise in gilt yields over the month reducing liabilities. Despite ongoing concerns about short term inflation and the rising cost of living, long-term inflation expectations fell over the month helping to reduce deficits further.

XPS Pensions Group actuary Tom Birkin said: "With the Bank of England widely expected to increase interest rates for a fourth time this week to combat surging inflation, the yield on long-term gilts reached over 2% in late April for the first time since 2015.

"This is good news for pension schemes who will have seen their liabilities decrease as a result, but comes at a time where pensioners are battling against the rising cost of living. Trustees will have to weigh up any potential opportunities to de-risk and lock in some these gains against the option of providing additional increases to member pensions."

Mercer

Mercer's pensions risk survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK's 350 largest listed companies fell by £24bn over the course of April, standing at £45bn at the end of the month - a decrease from £69bn at the end of March.

It said liabilities fell from £837bn at 31 March 2022 to £784bn at the end of April driven by further increases in corporate bond yields. Asset values also fell to £739bn compared to £768bn at the end of March.

Mercer UK wealth trustee leader Tess Page said: "The month end position has again shown an improvement month-on-month and is now back at a level last seen in April 2020. The main driver of the change has been the increase in bond yields. These improvements are good news in the current economic environment."

Page added: "This past week has also seen The Pensions Regulator (TPR) issue its 2022 annual funding statement which highlights TPR's general expectations of all DB schemes. The statement emphasises TPR's expectations for strong governance and robust integrated risk management especially in the context of the current economic and geopolitical situation. Even schemes that have good arrangements in place need to keep them under review, and it is likely that all schemes, even the best prepared, will need to take some action in view of the current climate."

Mercer's pensions risk survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts.

PwC

The funding status for the 5,000-plus corporate DB pension schemes in the UK continued to show that schemes are, on average, in a surplus position, PwC's latest pension trustee funding index shows.

The consultant said both asset and liability values fell over April 2022, resulting in a modest increase in surplus to £130bn based on schemes' own ongoing funding measures.

PwC's adjusted funding index showed a £270bn surplus - this incorporates strategic changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes.

PwC global head of pensions Raj Mody said: "The surplus trend continues for UK pension schemes and, with inflation still rising, this trend is set to continue.

"Most pension scheme benefits are linked to inflation, but there's usually a maximum increase that will be paid each year for members. Around nine out of ten schemes have limits on how much inflation they pass into pension increases. For nearly all of these schemes, this cap will be lower than the current rate of inflation, and so their liabilities will not be fully exposed.

"This gives them a buffer on top of existing surpluses. Even schemes with a modest deficit might well reach surplus by just waiting. There'll be a few exceptions, including schemes who have put in place insurance or hedging, when a third party will get the advantage from any inflation cap, instead of the scheme."

Mody added: "Of course, caps on pension increases don't only have an impact at the scheme level - they will also affect pensioners. Pension increases in defined benefit schemes are also typically only granted once a year, with reference to historic levels of inflation. Pensioners may well need to wait another year until their benefits catch up with the current inflation rates we're seeing today. There's a lag effect which doesn't matter in times of stable and low inflation, but can hurt in times of high and unpredictable inflation."

PwC pensions actuary Laura Treece noted: "Pension increases being based on historic levels of inflation doesn't only impact pensioners in DB schemes. Anyone who gets the state pension will see this in the increase they received in April. State pensions went up by 3.1% - less than half of the inflation rate recorded for March of 7%. And with inflation predicted to keep rising, the extra money going into pensioners' pockets won't cover the amount by which their bills are going up now in line with current inflation.

"It's a tough situation for a lot of people. We're seeing sponsors and trustees think about how they might help their pensioners. Some are actively considering paying discretionary top-ups to pensions if the high inflation rates we're seeing continue. This is something we haven't seen much of recently - discretionary increases were more common in the 1990s when there was no compulsory requirement for pension payments to go up each year. We may start to see more and more schemes bringing back this practice if inflation remains high."