On the go: Alternative approaches to scheme funding and investments could eliminate the UK’s current £190bn defined benefit pension deficit, according to new analysis by PwC.
The PwC Pension Funding Index showed that combined market volatility, equity market surges and a slight increase in government bond yields reduced the deficit of the UK’s 5,300 DB schemes to £190bn in November. This is the lowest point since the start of the coronavirus pandemic and the government’s policy responses to it.
The figure was £70bn lower than the £260bn recorded in October, and £100bn below the £290bn peak recorded in March this year.
Alongside the Pension Funding Index, PwC introduced an Adjusted Funding Index incorporating two strategic changes, which it claims are available to most schemes backed by viable companies.
The first is a shift toward higher-return, cash flow-generating assets at the expense of gilts, and the second is a deferred approach for funding long-term potential life expectancy improvements.
The Adjusted Funding Index eliminates the aggregate deficit entirely, recording a surplus of £10bn when applied to November this year. PwC argued that this shows what can be achieved when pension schemes consider innovative approaches.
PWC acknowledged that these approaches may not be appropriate for all schemes, especially those with non-viable sponsors or a long-term intention to pursue a buyout with an insurance company.
But the analysis suggests schemes with viable sponsors that intend to run off their schemes over time should focus on generating cash flow for paying pensions as they fall due, and including a diversified portfolio of assets with income-matching pensions obligations, which can include infrastructure investments.
Raj Mody, global head of pensions at PwC, noted that most “pension fund trustees and sponsors have become conditioned to a world where there is always a funding deficit”.
“You would hope that after years of paying in cash to pension schemes to repair deficits, then eventually that plan would have worked out,” he continued.
“Trustees and sponsors should review their strategy and deficit assessment afresh, without being tied to historic approaches or assumptions that may now be out of date.”
