Volatility in Gilt yields causes aggregate funding ratio to fall by nearly two percentage points

The aggregate surplus of the 5,215 schemes in the PPF 7800 index dipped in July to £254.3bn (€301bn), but funding levels remain strong on a historical basis, according to the latest PPF 7800 update.

Commenting on the August index, released today, Iain Tait, senior actuarial director at independent consultant Broadstone, said: “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 buy-out funding will be much closer than at previous valuations, or even above 100%.

“For those with end-game 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.”

Other points noted in the recent PPF 7800 index include that the funding ratio decreased from 120.1% at the end of June 2022 to 118.2%. Furthermore, total assets were £1.65trn, with total liabilities running at £1.4trn. The PPF said there were1,490 schemes in deficit and 3,725 schemes in surplus. 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.

Vishal Makkar, head of retirement consulting at Buck, said: “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 DB funding, which was launched by the DWP [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.”

The DWP is working on the details of a new DB funding code, having launched a consultation on the new rules in July. By updating the current funding code, the DWP aims to achieve better and clearer funding standards. Under the new proposed regime, schemes will need to set out their long-term objective, to run on with low dependency on sponsor support, and to establish a journey plan to get to their long-term objective.