The accounting deficit of the defined benefit schemes of the UK’s 350 biggest public companies fell to £45bn at the end of last month — a level last seen in April 2020.
Mercer’s Pensions Risk Survey revealed that the deficit dropped by £24bn from £69bn at the end of March on the back of rises in corporate bond yields.
Liabilities fell from £837bn as of March 31 2022 to £784bn at the end of April, driven by further increases in corporate bond yields, while asset values fell to £739bn compared with £768bn at the end of March.
Even schemes that have good arrangements in place need to keep them under review, and it is likely that all schemes, even the best prepared, will need to take some action in this current climate
Tess Page, Mercer
Tess Page, UK wealth trustee leader at Mercer, said the month-end position has shown an improvement month on month and that the main driver has been the increase in bond yields.
“These improvements are good news in the current economic environment,” she said.
The move comes after the Pensions Regulator’s annual funding statement, which highlighted the uncertain economic and geopolitical backdrop and its potential impact on scheme valuations.
“Even schemes that have good arrangements in place need to keep them under review, and it is likely that all schemes, even the best prepared, will need to take some action in this current climate,” Page said.
Corporate pension funds in surplus
It comes as PwC revealed the UK’s 5,000-plus corporate pension schemes posted a £130bn surplus on average in its Pension Trustee Funding Index, with the trend set to continue given rising inflation.
The surplus grew to £270bn under the consultancy’s Adjusted Funding Index, which considers a move from low-yielding gilts to higher-return, income-generating assets, and a different approach for potential life expectancy changes.
Raj Mody, global head of pensions at PwC, said the surplus trend will continue and that most scheme benefits are linked to inflation, but there is usually a maximum increase that will be paid each year for members.
Around nine in 10 schemes have limits on how much inflation they pass into pension increases, he said.
He explained that for nearly all these schemes, the cap will be lower than the current rate of inflation, which means their liabilities will not be fully exposed.
“This gives them a buffer on top of existing surpluses. Even schemes with a modest deficit might well reach surplus by just waiting,” Mody continued.
“Of course, caps on pension increases don’t only have an impact at the scheme level, they will also affect pensioners.
“Pension increases in DB schemes are also typically only granted once a year, with reference to historic levels of inflation. Pensioners may well need to wait another year until their benefits catch up with the current inflation rates we’re seeing today.”
Trustees and sponsors seek to help pensioners
Pension increases will also affect those claiming the state pension, which rose by 3.1 per cent compared with the inflation rate, which was 7 per cent in March.
TPR funding statement flags uncertainty impact for valuations
High levels of uncertainty surrounding inflation, interest rates, mortality, energy prices and economic growth will put additional pressure on trustees completing their tranche 17 valuations this year, according to the Pensions Regulator’s annual funding statement.
Laura Treece, pensions actuary at PwC, said sponsors and trustees are thinking about how to help their members, with some actively considering paying discretionary top-ups to pensions if high inflation remains.
She explained: “This is something we haven’t seen much of recently — discretionary increases were more common in the 1990s when there was no compulsory requirement for pension payments to go up each year.
“We may start to see more and more schemes bringing back this practice if inflation remains high.”
