DB funding levels improve amid favourable markets

The data reveal that the combined deficit of the sample schemes dropped by £9bn to £72bn at the end of the month, from £81bn at the end of May. 

Mercer stated that the increase was driven by an £11bn surge in asset values, which rose to £814bn at end-June, compared with May’s figure of £803bn.

Liability values rose by just £2bn over the month to £886bn from £884bn, driven by a fall in corporate bond yields offset by a small drop in market expectations for future inflation, it added. 

Data released by the Pension Protection Fund for May also show an improvement in funding levels. 

According to the lifeboat fund’s PPF 7800 Index, which provides an estimated funding position for 5,318 DB schemes, the total deficit of the 2,449 schemes in deficit at the end of May stood at £117.8bn, down from £135.8bn at the end of April. 

Meanwhile, the total surplus of the 2,869 schemes in surplus rose to £212.4bn from £189.5bn over the same period. 

Commenting on Mercer’s data, Charles Cowling, chief actuary at the company, said: “Funding levels continue to improve as markets remain favourable, despite the looming threat of inflation and the UK’s challenging emergence from the Covid-19 lockdown.

“[In June], inflation hit a two-year high and the Bank of England expects it to rise further. However, the bank still voted last week to hold interest rates at their current record low levels and their quantitative easing programme unchanged.

“These conditions are challenging for pension schemes and trustees who, with no respite on persistently high pension liabilities, are being called on by the Pensions Regulator to establish a clear path to their long-term objective,” he continued.

“But with positive market conditions, there are opportunities for trustees to lock in gains and get ahead on this journey. Trustees should therefore be vigilant to such opportunities and consider planning now how they propose to meet the regulator’s new objective.”