DB funding — July 2022: Funding levels remain steady

Funding levels steady and in surplus but liabilities up amid rising inflation expectations

clock • 6 min read

Every month, several firms issue trackers of the aggregate defined benefit (DB) scheme funding position. Here are the July 2022 estimates on the various measures…


The aggregate surplus of the 5,215 schemes in the PPF 7800 index is estimated to have decreased over the month by £13.6bn to £254.3bn at the end of July 2022, from £267.9bn at the end of June 2022, the Pension Protection Fund (PPF) said.

Assets totalled £1,653.7bn and liabilities amounted to £1,399.4bn, compared to £1,598.7bn and £1,330.8bn at the end of June 2022.

Additionally, the funding ratio decreased slightly from 120.1% at the end of June 2022 to 118.2% in July.

The PPF said there were a total of 1,490 schemes in deficit and 3,725 schemes in surplus - noting the aggregate deficit of the schemes in deficit at the end of July 2022 was £29.8bn, up from £25.3bn at the end of June 2022.

PPF chief finance officer and chief actuary Lisa McCrory said: "For the first time in six months, we've seen the funding position for the 5,215 schemes under our protection decline. This decline is the result of a fall in bond yields as markets anticipate the recent central bank tightening cycles may be drawing to a close.

"While the aggregate surplus for the PPF 7800 index remains positive, the economic outlook remains uncertain with the risk of an uptick in the rate of corporate insolvencies. We encourage trustees, even if their funding position is strong, to have contingency planning for employer insolvency in place."

Buck head of retirement consulting Vishal Makkar added: "Funding levels for schemes continued to remain steady and in surplus throughout July. Small changes to both assets and liabilities meant that the funding ratio is now at 118.2%.

"Despite this relative stability in funding, it's certainly not all plain sailing for trustees. We've seen further recent rises in both inflation figures and the Bank of England's base rate, as concerns about the cost of living dominate the news agenda. The uncertain economic climate is just one cause for concern though and many trustees, particularly at smaller schemes, may have worries about upcoming regulatory changes too.

"The latest consultation on defined benefit (DB) funding, which was launched by the Department for Work and Pensions at the end of July, is a welcome sign for pension schemes that the new DB funding regime is finally starting to come together after a series of pandemic-related delays. Trustees at smaller schemes may, however, have concerns about how these changes could increase the complexity and weight of regulation they face.

"Ultimately, we'll have to wait until we see the full guidance from the regulator before we can know for sure exactly how schemes will be affected by the rules."

Broadstone senior actuarial director at independent consultant Iain Tait noted: "Despite a small dip through July, funding levels for DB schemes are still in a healthy position with an aggregate surplus around four times higher than a year ago. The significant improvements in funding levels over the last year, driven by rising yields, should continue to be seen as a really loud call for action by both scheme trustees and sponsors. For many, full buyout funding will be much closer than at previous valuations, or even above 100%.

"For those with endgame plans already in place it's time to re-evaluate objectives, funding levels and consider further investment de-risking. Sponsors should, even more so than previously, be wary of the risk of trapped surpluses and be considering their options to manage this risk, such as the use of escrow accounts. For those with no plans in place potential opportunities are being missed."


Mercer's pensions risk survey data shows that the accounting surplus of defined benefit pension schemes for the UK's 350 largest listed companies decreased by £9bn over the course of last month, standing at a total surplus of £2bn by 29 July.

The consultant said liabilities rose from £667bn at 30 June 2022 to £709bn at the end of July driven by falls in corporate bond yields and a rise in the market's view of future inflation. It said asset values also increased over the period to £711bn compared to £678bn at the end of June, which helped to offset the increase seen in the liabilities.

Mercer principal Matt Smith said: "The month-end aggregate funding position on an accounting basis is expected to continue to be showing a surplus, despite bond yields falling. The reduction in surplus is a timely reminder, for trustees and corporate sponsors looking for opportunities to lock in funding gains, that markets remain volatile and if you blink there is always the chance you might miss it."

Smith added: "Last week also saw the Department of Work and Pensions issue its long-awaited consultation on funding regulations, with a proposal for pension schemes to have their long-term plans set out in a funding and investment strategy.

"The proposed regulations could significantly change long term funding objectives and will increase the focus on journey planning. With funding positions currently strong, employers may wish to strengthen their engagement with trustees on potential opportunities and consider the end game for their schemes."

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.

XPS Pensions Group

Deficits of UK pension schemes decreased by around £2bn against long-term funding targets over the month to 28 July, analysis from XPS Pensions Group's DB:UK funding tracker reveals.

The consultant said that, based on assets of £1,685.0bn and liabilities of £1,739.0bn the average funding level of UK pension schemes on a gilts plus 0.5% basis was 96.9% as of 28 July 2022.

XPS estimates that at the end of July 2022 the average pension scheme would need an additional £5,000 per member to ensure it can pay their pensions into the long-term.

The consultant said inflation continued to have a large impact on pension scheme liabilities, with current levels driving up benefits.

Despite this, it said a slight fall in long-term inflation expectations contributed towards a marginal improvement in funding levels over July despite a slight fall in gilt yields - noting this adds to the improvements in long-term positions that it had seen over 2022, cumulative improvements it calculates are now in excess of £270bn.

XPS Pensions Group senior investment consultant Felix Currell said: "Whilst July has seen pension scheme liabilities stay fairly flat compared to recent months, hedging strategies continue to be under stress.

"Many schemes that use leveraged liability-driven investment products have been required to post significant collateral, bringing forward the need for trustees to consider the liquidity position of their schemes. The threat of global recession still looms over growth markets, however it was interesting to see the positive response in US equities in particular following the US Fed's announcements."

DB:UK tracks the funding position of UK DB pension schemes on a long-term target basis and allows real time monitoring of changes and analysis of the reasons behind any movement.

XPS Pension Group said it has updated its model to account for the current period of high inflation - an amendment which has led to it revising its June figures.

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