PwC and Mercer DB pension scheme deficits at odds

PwC’s Pensions Funding Index, which tracks the funding level of more than 5,300 corporate DB pension schemes, shows the aggregate deficit has fallen to zero from £120bn in February.

Meanwhile, data from Mercer’s Pension Risk Survey show the accounting deficit of DB schemes of the UK’s 350 largest listed companies has risen by £13bn, to £79bn at the end of February from £66bn at the end of January.

The zero deficit recorded by the PwC index is a result of continued cash contributions to repair deficits, alongside evolving forecasts for future unknowns such as life expectancy and inflation.

Furthermore, PwC’s Adjusted Funding Index — which incorporates strategic changes such as moves away from low-yielding gilt investments to higher-return, cash flow generative assets, and a different approach for potential life expectancy improvements that are yet to occur — shows an overall DB pension scheme surplus of £180bn.

While Mercer’s survey reported a fall in liabilities across the FTSE 350 DB pension schemes it tracks, a £44bn drop in asset values led to a deficit spike.

Aggregate liability values of the FTSE 350 schemes fell to £858bn at the end of February from £889bn on January 31. According to Mercer, this was driven by increased corporate bond yields, which were offset by an increase in inflation expectations.

Asset values for the schemes fell to £779bn at the end of February compared with £823bn at the end of January.

Raj Mody, partner and head of pensions at PwC, said it was “reassuring” that DB pension schemes had neutralised their deficits overall, and was “no surprise” given the combination of deficit repair payments coupled with “slightly more favourable market conditions”.

He added: “However, it would be wrong to think the position for pension schemes is now sorted for good. It’s not necessarily the case that the recent improvement in forecast long-term yields is here to stay.”

With regard to the recovery of the economy, Mody noted it may not be a good time to risk overfunding and trapping money in schemes when the economy needs investment to ensure a “strong and fast” recovery.

Charles Cowling, chief actuary at Mercer, suggested the chancellor needs to raise taxes to pay for the spiralling debt, but there are “dire warnings” that the UK economy cannot take tax rises at present and additional support is needed from many commentators.

He said: “In recent weeks, there are market concerns about future inflation rising — possibly in response to increasing worries about the UK economy. These are testing times for pension schemes, particularly in the industries hardest hit by the pandemic.

“It is possible to see scenarios where scheme liabilities continue to rise, pension asset values are under fire, and more companies get into difficulty and possibly even falling into insolvency.”

Cowling added that the situation is “not gloomy for all trustees” since many have derisked pension scheme investments, matching their assets to their liabilities.

“Nevertheless, some pension schemes are running more risk than can be easily supported by the strength of the employer covenant,” he said.

“The Pensions Regulator’s guidance on integrated risk management suggests pension trustees reduce risks to levels that can be managed by their struggling employers. That’s easier said than done.”