Despite Falling Markets, UK DB Funding Levels Continue to Rise

Despite falling equity markets, the aggregate surplus of the 5,215 defined benefit plans in the Pension Protection Fund’s PPF 7800 increased to an estimated £267.9 billion at the end June from £261.6 billion at the end of May thanks to sharply rising bond yields.

The increase in funding helped boost the estimated aggregate funding ratio of the pension plans to 120.1% from 118.9% at the end of May, and from 106.5% in June of 2021.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Total assets for the plans in the index decreased 2.7% during the month to £1.598 trillion, and were down 9.9% over the year. However, total plan liabilities were down even more, decreasing 3.6% during the month to £1.33 trillion, and tumbling 20.2% from a year earlier.

The number of plans in surplus rose to 3,817, or 73.2% of all plans, at the end of June, from 3,765, or 72.2%, at the end of May, and from 2,958 plans, or 56.7% of all plans, at the end of June 2021. Meanwhile, the number of plans in deficit decreased to 1,398, or 26.8% of the total, from 1,450 plans in deficit at the end of May (27.8%), and 2,257 plans (43.3%) at the same time last year.

The total surplus of plans in surplus increased to £293.2 billion at the end of June from £289.8 billion a month earlier, and from £212.6 billion during the year-ago month. The aggregate deficit among the plans in deficit decreased to an estimated £25.3 billion at the end of June from £28.2 billion at the end of May, and from £104.7 billion at the end of June 2021.

Despite a 5% drop during the second quarter for the FTSE All-Share Total Return Index, AA-rated corporate bond and gilt yields both rose sharply, according to PwC, which said credit spreads have widened further, reflecting an increase in economic uncertainty and pessimism. The rising bond yields have led to “significant reductions in scheme liabilities and the emergence of greater surpluses, despite the equity falls,” says a PwC report on pensions accounting trends.

According to PwC’s Adjusted Funding Index, the funding surplus of the more than 5,000 U.K. corporate DB plans rose to an estimated £360 billion in June.

“Trustees and sponsors should bear in mind that they might need to use up some of their surplus if any issues come to light for their scheme,” Laura Treece, a pension actuary at PwC, said in a statement. “For those looking to transfer their pension risk to a third party, we’re seeing a lot of data quality concerns arise in the run up to transactions. If not addressed quickly and managed carefully, dealing with data problems can easily eat up a surplus.”