Buoyant DB pension funding environment may hasten endgame

The latest PPF 7800 index shows the aggregate surplus of the 5,131 schemes covered by the index is estimated to have fallen by £2.3bn during January 2023.

This takes it down to £374.4bn, from a surplus of £376.7bn at the end of December 2022, a fall of 0.72 per cent. 

This funding ratio is also therefore decreased to 134.8 per cent from 136.5 per cent at the end of December 2022.

Total assets were £1,450.6bn and total liabilities were £1,076.2bn. 

A total of 4,425 schemes were in surplus — 84 percent of the total — with just 706 (16 percent) in deficit.                          

That total of schemes in deficit at the end of January 2023 had increased to £5bn, up from £4.5bn at the end of December 2022.    

Lisa McCrory, PPF chief finance officer and chief actuary, said: “We’ve seen the aggregate assets and liabilities of schemes in the PPF 7800 index rise in January, as yields on government bonds fell.

“This was in part due to falling energy prices, which has led to markets anticipating that global central banks are getting close to the end of their tightening cycle and slowing the pace of rate rises — an expectation that was realised at central bank policy meetings in the first week of February.”

A good year for derisking

David Hamilton, chief actuary at independent consultancy Broadstone, said: “A relatively calm and stable start to the year has resulted in minimal volatility in pension scheme funding.

“However, this follows a year which saw dramatic improvements in funding, albeit characterised by spells of significant market turbulence, so 2023 is set up for a bumper year of derisking.”

Many schemes are much closer to endgame than they would have foreseen just 12 months ago, said Hamilton, and they should revise their plans to manage risk levels while in preparation for buyout. 

“They will face a hugely competitive market when it comes to attracting and engaging insurers so, more than ever, good preparation and a high quality of data will be critical, particularly for schemes at the smaller end of the market,” added Hamilton.

Schemes may focus on governance requirements...

Vishal Makkar, head of retirement consulting at Buck in the UK, said of the index: “Broadly, DB schemes have started the year in a very strong funding position, though of course there may be some concerns for the financial health of some scheme sponsors facing a difficult economic climate.”

Many schemes will be turning their attention to governance issues, as the new single code of practice from the Pensions Regulator is expected to come into force this year. That will require schemes to establish an effective system of governance and carry out an own-risk assessment.

Both of these are likely to be projects requiring a substantial amount of work.

Makkar added: “Schemes have had a long time to prepare for the new single code, so it’s vital they have a plan in place to meet their obligations. 

“Evaluating existing practices and carrying out a gap analysis are important first steps, but schemes should now be turning their attention to the timelines, checklists and procedures they need to ensure they meet the requirements of the regulator. 

“Failure to act early on this could jeopardise the scheme’s journey plan and seriously hinder progress towards other long-term objectives, such as buyout.”

...but plenty of preparation remains for buyout

Kieran Mistry, senior business development manager at Standard Life, a part of Phoenix Group, said: “While DB funding levels remain relatively stable at present, the turbulent recent economic environment means DB scheme trustees and sponsors are focused on their DB derisking and endgame strategies. 

“With many schemes closer to their endgame than expected, the bulk annuity market has got off to a rapid start, and this is expected to continue throughout the year. 

“Ultimately, with the potential for a challenging economic backdrop over the rest of 2023, schemes will be aiming to lock down risk and benefit from any gains over the last year. For schemes hoping to secure a buyout in the short to medium term, the focus should be on ensuring they are fully prepared before approaching insurers to get the best out of a very busy market."

The PF 7800 index offers a monthly estimate as to the funding position of all schemes that might be eligible for entry to the Pension Protection Fund, on a section 179 basis.

A scheme's s179 liabilities are an approximation of the premium that would fall due if an insurance company was to take on the liability of the indefinite payment of members’ benefits. This compensation may be lower than full scheme benefits.