DB funding - August 2022: Surplus improves by £60bn

Funding levels continue to rise on the back of higher gilt yields, but outlook is uncertain

clock • 8 min read

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


In August, the aggregate surplus of 5,215 schemes in the Pension Protection Fund's (PPF) 7800 Index increased by £60bn to £313.8bn as bond yields continued to rise, marking the highest surplus since the PPF started reporting the data.

The number of schemes in surplus increased to 4,081 at the end of August 2022 from 2,894 schemes at the end of August 2021, while the surplus of the index was £254.3bn at the end of July.

The improvements led to the funding ratio increasing from 118.2% at the end of July to 125.1% - a huge rise from the 105.4% recorded a year ago in August 2021.

Total assets were £1.6trn and total liabilities were £1.3trn at the end of August 2022.

There were 1,134 schemes in deficit, with the aggregate deficit of these schemes falling to £14.3bn, down from £29.8bn at the end of July 2022. Over the month, s179 liabilities fell by 10.6% because of rising gilt yields as the Bank of England tackles inflation.

PPF chief finance officer and chief actuary Lisa McCrory said the improvement in funding levels was mostly due to the central bank's "forceful approach" to tackling inflation, their plans to sell off gilt holdings, as well as the expectation that the new prime minister's planned tax cuts and energy market intervention will materially increase the UK's borrowing.

"We've not seen an increase in bond yields like this since January 2009, and the overall increase since November 2021 has more than doubled the largest previous increase in yields since the Bank of England gained independence in 1998," she said.

The ten-year fixed interest gilt yield rose by 97bps in August and is up 222bps over the year, said the PPF's update. Meanwhile, UK equity markets either fell slightly or were stagnant, with the FTSE All-Share Total Return Index falling -1.7% in August while the FTSE All-World Ex-UK Total Return Index rose by just 0.9%.

McCory added that while the near-term economic outlook is "highly uncertain", the PPF remains in a "strong financial position". It is "well positioned to weather this period of uncertainty irrespective of how scheme funding and insolvency rates evolve in the future," she said.

Buck UK head of retirement consulting Vishal Makkar said there is still cause for concern for trustees in the coming months with further interest rate hikes on the cards and inflation projected to reach 13% this year.

He said: "As they look to shelter investments from the uncertain economic climate, trustees and sponsors look to inflation-proof assets to safeguard their pension schemes and, ultimately, members' pensions from increased volatility.   

"As the newly appointed government indicates that it is likely to announce wider budget plans in the coming weeks, trustees and sponsors may be forced to reassess their position and consider necessary measures to ensure schemes are ready for a bumpy winter."

Broadstone senior actuarial director Jaime Norman pointed out that the schemes with the biggest improvement in funding levels include those with the lowest levels of liability hedging. 

"While it can be tempting to continue chasing further gains, employers and trustees should be considering if changes are needed to bank the gains seen to date," he said.

Scheme sponsors may expect to see an increase in focus on pension increases, Norman added, as funding improves alongside high short-term inflation. Those schemes that only pay statutory pension increases could see requests from trustees and members for one-off discretionary increases.

"Any additional discretionary pension increase will have a financial impact on the scheme and scheme sponsors should be clear on how this will impact its long-term plans for the scheme. Employers may want to proactively raise this with trustees and work with trustees to manage how this is communicated to members," he said.

BlackRock head of UK fiduciary business Sion Cole added: "Over August the PPF 7800 funding levels had a sizeable increase from 118.2% to 125.1% . This is reflective of the record rise in bond yields and falling liability values. Markets are responding to US Fed chair Jackson Hole's speech, where he reasserted the Fed's commitment to bringing inflation down. So, while we see monetary policymakers ultimately accepting a higher rate of inflation in the short to medium terms, we are positioned across all asset classes for a continuation of the current monetary environment."

"In the UK, the Bank of England has been candid about their assessment that raising interest rates enough to bring inflation down to the 2% target, will ultimately harm the economy. More broadly, we think the UK is dealing with an underlying inflation issue driven not only by the shock of energy prices, but also a reduction in production capacity owing to low levels of labour supply. We are also beginning to see pressures on company earnings, which in turn has led to increasing numbers of corporate insolvencies, which denotes the strong need for contingency planning. Compared to the PPF 7800 index, not every scheme saw positive improvements last month - given these are also contingent on each scheme's asset allocation and risk positioning. Furthermore, we're neutral on European government bonds and have a modest overweight to UK gilts with a preference for short-dated bonds due to markets pricing in an overly hawkish rate path."

"The substantial monthly gains and volatile economic environment continue to highlight the value of risk management and thoughtful positioning, with meeting liabilities and funding goals remaining key considerations. There is a continued lack of consensus from fund managers on where base rates will end up, and this illustrates why scheme managers must take a long-term view, and demonstrate the importance of diversification into multiple asset classes, including alternatives and illiquid securities."


Mercer's pensions risk survey data shows that the accounting surplus of DB pension schemes for the UK's 350 largest listed companies increased by £7bn over the course of last month, standing at a total surplus of £9bn by 30 August 2022.

The consultant said liabilities fell from £709bn at 29 July 2022 to £657bn at the end of August driven by rising corporate bond yields offset by a rise in the market's view of future inflation. It said asset values also fell over the period to £666bn compared to £711bn at the end of July, a fall of £45bn which reduced the impact of the liability falls.

Mercer principal Matt Smith said: "The August aggregate funding position on an accounting basis has remained in surplus, despite inflation expectations rising. But the aggregate funding position has been volatile over August 2022 and there is no sign that stability is around the corner.

"Bond yields jumped through the 4% mark - the first time for eight years - and inflation expectations continue to increase. While rising inflation creates many challenges for individuals and businesses, it will be a welcome relief that pension schemes' funding continues to fend off these effects."

Smith added: "With the cost of living continuing to rise and members' personal finances expected to be squeezed over the remainder of the year, schemes may see increased member activity as members explore options to bolster household incomes. Trustees and Sponsors will play a key role in ensuring members understand their options and receive fair value for their benefits."

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 have decreased by around £69bn against long-term funding over the month to 31 August 2022, analysis from XPS Pensions Group DB:UK funding tracker reveals.

The consultant said that, based on assets of £1,623bn and liabilities of £1,620bn, the aggregate funding level of UK pension schemes on a long-term target basis was 100.2% as of 31 August 2022.

It said this is the first time UK schemes had become 100% funded on a long-term target basis for the first time since aggregated records began.

The consultant said rising gilt yields continued to be the main contributor to improvements in funding levels during August, with rises in yields of 0.7 percentage points over the period being partially offset by a small rise in long term expectations of inflation.

It said this adds to the improvements in long-term positions that the firm had seen over 2022 - improvements that are now in excess of £330bn for the year.

XPS added that, while equity markets struggled over August, performance was pushed back into positive territory for many UK pension schemes due to depreciation of sterling over the month.

It added that matching assets continued to fall alongside liability values, but this remains beneficial for schemes that are not fully hedged, particularly when looking at longer-term assumptions.

XPS Pensions Group actuary Tom Birkin said: "The Department for Work and Pensions launched its long-awaited consultation on DB funding rules and long-term funding objectives at the end of July. However, with the average UK pension scheme now fully funded on a long-term basis, there may not be as many schemes having to take drastic action as a result of the new regulations as once thought.

"Now is an excellent opportunity for schemes to consider their investment strategies to ‘lock in' these significant gains and to think about what the ultimate endgame for the scheme might be. This is good news for pension scheme members as securing members benefits is within reach for more schemes than ever before."

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.

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