DB pension scheme surplus increases by $75.68bn in May

Asset values also decreased during May, from $2131.70bn to $2068.63bn

The aggregate defined benefit (DB) pension scheme surplus in the UK increased by £60bn ($75.68bn) to £190bn ($239.66bn) in May, according to the PwC Pension Trustee Funding Index.

Based on schemes’ own measures, the funding ratio increased from 108 per cent at the end of April to 113 per cent at the end of May.

Liabilities fell by £110bn ($138.75bn) to £1,450bn ($1828.97bn) over the month, which PwC attributed to the continuing drop in bond prices.

Asset values also decreased during May, from £1,690bn ($2131.70bn) to £1,640bn ($2068.63bn).

PwC’s Adjusted Funding Index, which incorporates strategic changes ‘available for most pension funds’, including a move away from low-yielding gilt investments to higher return, income-generating assets, and a different approach for the longevity assumption, showed a surplus of £320bn ($403.64bn).

This is a £50bn ($63.07bn) increase on April, with the funding ratio rising from 119 per cent to 124 per cent, according to the Adjusted Index.

PwC urged sponsors and trustees to review longevity forecasting following The Pensions Regulator’s Annual Funding Statement, which said that the impact of Covid-19 remained unclear.

The statement indicated that where an allowance for Covid-19 is made in longevity assumptions, they would expect any reduction in liability values to be no more than 2 per cent.

Commenting on the findings, PwC global head of pensions, Raj Mody, said: Pension schemes remain well funded based on their own assessments for funding purposes, improving again this month in aggregate.

This includes a prudent allowance for potential life expectancy improvements which have not yet happened. It’s natural for pension funds to make conservative assumptions, but they should understand the size of these reserves as part of their planning. Otherwise their decisions around risk management might be out of kilter, he  said.

He said: Long-term life expectancy is notoriously difficult to predict, and forecasts are often presented in complicated language and parameters making it hard for trustees and sponsors to tune into the details. Advisers should be challenged to explain matters in practical terms and real-life scenarios.