The aggregate surplus of defined benefit (DB) pension schemes in the UK remained at £20bn in September, according to the PwC Pension Funding Index.

As reported by our sister title, Pensions Age, during the month, asset and liability values both fell by £40bn, resulting in the surplus remaining the same as at the end of August. Assets decreased to £1,810bn, while liabilities fell to £1,790bn.

The funding ratio therefore also remained stable at 101 per cent, with the aggregate funding position now staying out of deficit for eight consecutive months.

PwC’s Pension Funding Index measures the aggregate DB deficit based on schemes’ own measures.

“Our funding index shows that pension schemes on the whole remain in a good position,” said PwC global head of pensions, Raj Mody.

“But even well-funded schemes need to have the right strategies to stay in good health. Recent inflation figures will remind sponsors and trustees of the importance of positive real returns on their asset portfolios.

“Huge demand from pension schemes for index-linked gilts has driven up prices, so these assets now deliver negative real returns.

“These market distortions don’t only impact assets - they affect liability valuations too. Trustees can unknowingly end up in a situation where their whole approach is built on a misleading picture.

“They have to ask the right questions of their various advisers to build a complete understanding of alternative and more efficient strategies.”

PwC also measures schemes’ funding levels using its Adjusted Funding Index, which incorporates strategic changes available for “most” pension schemes, including a move away from gilt investments to higher-return, cash-flow generative assets, along with a new approach for funding long-term potential life expectancy improvements that are yet to happen.

The adjusted index estimated that the surplus declined by £10bn during September to £190bn, with liabilities falling by £30bn to £1,650bn and the funding ratio remaining at 112 per cent.

“The supply and demand imbalance for inflation protection in markets means that forecasting inflation using market predictions is not very reliable,” commented PwC pensions actuary, Laura Treece.

“Sponsors and trustees should review their inflation forecasts and assumptions. This could have a significant impact on their pension scheme funding level. It might be better than they thought.

“A more accurate understanding would help schemes avoid taking unnecessary risk or tying up extra cash. These schemes might be closer to their ‘endgame’ than they realise.

“If their strategy includes transferring to an insurance company or DB consolidator, this also means fewer years of paying running costs, and securing member benefits sooner than expected.”

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