Scheme surpluses creep up following gilt yield rise

Aggregate surplus of UK pension schemes rose over May as gilt yields increased

Holly Roach
clock • 3 min read
Scheme surpluses creep up following gilt yield rise

Surpluses of UK defined benefit (DB) pension schemes have risen following a sharp increase in gilt yields, according to industry analysis.

XPS Pensions Group's DB:UK Funding Watch revealed the aggregate surpluses of schemes rose over May to £110bn. 

This rise, according to XPS, was due to a "significant rise" in long-term gilt yields of 0.5% over the month which led to a decrease in the value of liabilities, resulting in improved scheme funding.

For comparison, at the end of April XPS estimated surpluses were £69bn. 

The firm's analysis also revealed based on assets of £1,393bn and liabilities of £1,283bn, the aggregate funding level of UK pension schemes on a long-term target basis was 109% as of 30 May 2023.

This comes as PwC noted the increase in gilt yields during May reduced the estimated buyout cost for the UK's 5,000-plus DB schemes.

The PwC Buyout Index recorded a surplus of £200bn in May, with the firm noting schemes are reviewing buyout strategies as a result. The firm's low reliance Index also continues to show a sizable surplus of £350bn.

XPS senior consultant Felix Currell said: "Long-term gilt yields have continued to rise across May, particularly following the latest UK inflation figures and the market's swift reaction to them. This has led to most liability-driven investment (LDI) managers starting to call for additional capital to support their leveraged pooled funds.

"However, reduced leverage and greater operational robustness following regulatory guidance means there is a clear distinction between these capital calls and the panic observed during the 2022 gilts crisis. So far, we have seen manageable calls and a smoother process being followed by the managers than last Autumn.

"Of course, whilst long-term yields have started to approach levels seen during the crisis, they still remain below the peaks of the crisis and crucially the rise has not been as rapid. Whilst we would have expected LDI managers to hold up better under the current environment, it's comforting to witness a smoother approach play out in practice.

"This will continue to be put to the test as gilt yields are generally expected to remain volatile whilst uncertainty around inflation persists, and schemes heavily invested in illiquid assets may again need to start thinking about the role of these assets alongside their hedging strategy."

PwC head of pensions funding and transformation John Dunn said: "The UK's DB pension schemes continue to remain well funded, with rising gilt yields driving liability valuations down over the month. While insurance won't be the right solution for every scheme, we're now nearing the halfway point of what could well be the biggest year on record for the transfer of pension schemes to insurers. 

"We're seeing new entrants being drawn to a hot demand driven market. At the same time, established insurers are also looking to boost the size of their bulk annuity teams to deal with demand. As a result, some insurers are specialising and becoming more focused on particular areas of the market and deal sizes. We are still seeing an appetite for schemes of all sizes - not all insurers focus on mega deals - but it will be more important than ever for sponsors and trustees to stay close to the market so that they understand capacity and demand for their particular scheme."

PwC head of pension risk transfer Swapnil Katkar added: "This year, UK pension schemes have unexpectedly found themselves with better funding levels, causing a stampede among many schemes to execute an insurance-based risk transfer. Although there is a robust rationale to this, we are also seeing pension trustees and corporate sponsors assessing the viability of an insurance transaction through both a ‘value-for-money test' and an ‘affordability test'.

"For schemes planning to transfer their pension risk to a third party, they need to focus on assessing the suitability of any strategy from an affordability, value and execution readiness standpoint. This ensures that schemes can achieve an outcome that works for all parties, including their members, trustees and corporate sponsor."

Read more: Professional Pensions' DB Funding Index

More on Defined Benefit

Industry welcomes proposals to grant DB schemes easier access to surpluses

Industry welcomes proposals to grant DB schemes easier access to surpluses

Providing schemes access to surpluses could be of ‘great benefit’ to sponsors and members

Martin Richmond
clock 18 April 2024 • 8 min read
FTSE 350 DB aggregate surplus sees narrow growth in March

FTSE 350 DB aggregate surplus sees narrow growth in March

Mercer analysis finds surplus grew by £7bn and aggregate funding levels rose to 111%

Martin Richmond
clock 17 April 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 17 April 2024 • 1 min read