UK corporate defined benefit (DB) pension schemes overall have arrived at record surpluses, totalling £250bn at end-June 2022 and resulting in a consequent funding ratio of 119%, according to PwC’s latest Pension Trustee Funding Index.

The surplus was the highest recorded since the index was introduced in 2014, and £60bn more than the figure for May.

PwC said the increase was mainly driven by the continuing rise in long-term bond yields, resulting in falls in the value of the liabilities which schemes need to cover. Asset values fell over the month, but not by as much.

The surplus is based on schemes’ own measurements, but PwC’s Adjusted Funding Index now shows an even higher surplus of £360bn.

This assessment incorporates strategic changes available for most pension funds, including a move away from lower-yielding Gilt investments to higher-return, income-generating assets, along with a different approach to pre-funding potential life expectancy changes.

However, Raj Mody, global head of pensions at PwC, warned that although the aggregate surplus for the UK’s 5,000-plus DB schemes is seemingly getting bigger, about 1,500 of those schemes are still in deficit.

He said: “Many of those will likely just need time to eliminate the deficit, as investment returns come good and prudent margins get released, instead of any additional cash payments from their sponsoring company.”

But he counselled that for those schemes with only a small surplus, it is important for trustees and sponsors to understand how that surplus has been determined, including what approximations have been made: sometimes there are “unknown unknowns”, unless schemes know where to look, he said.

Mody observed: “The method for tracking a surplus might use an overly simplistic approach over time, presented in a glossy way through a technology portal, but actually some can be pretty rough and ready under the bonnet.”

This might include out-of-date membership data, or benefit interpretations which have not been independently verified. There might be a disconnect between the actuarial valuation and member administration systems.

“Financials are volatile and some systems may not be set up to cope well with, for example, much higher than expected inflation,” Mody added. “All these and other issues could serve to rebase what looked like a comfortable surplus position into something more balanced.”

Laura Treece, pensions actuary at PwC, warned trustees and sponsors to bear in mind that they might need to use up some of their surplus if any issues come to light for their scheme. She said that for schemes looking to transfer their pension risk to a third party, PwC was seeing a lot of data quality concerns emerge in the run-up to transactions.

“If not addressed quickly and managed carefully, dealing with data problems can easily eat up a surplus,” said Treece, pointing to one case where the scheme surplus was originally estimated to be £25m, but had now appeared to be only £5m after some data cleansing; PwC has been brought in to try to salvage the situation.

Read the digital edition of IPE’s latest magazine