The funding status for the 5,000-plus corporate defined benefit (DB) pension schemes in the UK continues to show that schemes are, on average, in a surplus position, according to the PwC’s Pension Funding Index.
PwC’s reseach showed that asset and liability values both increased over November, resulting in a surplus of £20bn (€23.5bn) based on schemes’ own ongoing funding measures. This means the aggregate funding position has shown a surplus for 10 months, it said.
Raj Mody, global head of pensions at PwC, said: “Pension schemes remain well funded overall based on their own assessments for funding regulation purposes. But this is just one estimate at a point in time, and is closely tied to the value of gilts. This is not necessarily helpful for trustees and sponsors when they are making real-life decisions or working out their best strategy for delivering member benefits in an efficient and secure way.”
He added that the focus on Gilts when calculating pension scheme liability values in the current regime “causes all sorts of dysfunctions and inefficiencies in pension scheme management”.
“It inevitably influences decision-making. Some trustees and sponsors over-invest in Gilts to try and match how their liability values are assessed for funding regulation purposes, to reduce the chance of nasty surprises – what you measure is what you get,” Mody warned.
“When The Pensions Regulator introduces its new approach for pension scheme funding assessments, hopefully it will take the opportunity to bring this more in line with the practical realities of what defined benefit schemes are required to do,” he continued.
He added that it would help focus on the cashflows a scheme has to pay out over time, rather than just a single-point Gilts-based valuation. ”A different approach could free up pension schemes to invest more efficiently in a diverse range of income-generating assets,” he said.
Over the last decade, PwC has found, pension scheme investment in gilts has more than doubled, from 23% to 50% of their assets. That’s over £900bn of pension scheme assets currently invested in Gilts.
If the new funding regime is less focused on Gilts, the firm said, pension scheme asset portfolios could be more varied, with investment in Gilts falling back to the levels a decade ago. This would release almost half a trillion pounds’ worth of assets to be invested elsewhere.
Laura Treece, pensions actuary at PwC, added: “Changes in the way pension schemes are assessed could allow more of their assets to be invested in productive UK assets. These assets would help pension schemes ensure they are investing optimally and could generate the positive real returns needed to pay benefits for their members.”