UK DB funding ratio improve despite fall in surplus
The aggregate funding ratio for UK defined benefit (DB) pension schemes increased from 142.8 per cent to 143.9 per cent in January, despite downward trends in the estimated aggregate surplus, the latest Pension Protection Fund (PPF) 7800 Index has revealed.
As reported by our sister publication Pensions Age, the aggregate surplus of defined benefit (DB) pension schemes fell from £428.2bn at the end of December 2023 to £425.4bn at the end of January 2024.
This was based on total assets of £1,395.2bn and total liabilities were £969.8bn, meaning that the funding ratio increased from 142.8 per cent at the end of December 2023 to 143.9 per cent.
However, there was an increase in the number of schemes in deficit, rising from 582 in December 2023 to 599 in January 2024, leaving 4,451 schemes in surplus.
In line with this, the deficit of the schemes in deficit at the end of January 2024 rose to £4.3bn, up from £3.7bn at the end of December 2023.
Commenting on the findings, PPF chief actuary, Shalin Bhagwan, suggested that the marginal changes to aggregate surplus and funding ratio somewhat mask the relatively large increase in bond yields over the month.
“This was driven by stronger-than-expected inflation data in the UK impacting the markets expectations about the pace of rate cuts by the Bank of England, as well as increased issuance from both governments and corporate borrowers,” Bhagwan explained.
“Volatile bond markets vindicate higher collateral buffers which, coupled with the ongoing private market denominator effect, appears to have added to the complexity of formulating an appropriate end-game plan and a corresponding investment strategy.”
Adding to this, Buck, a Gallagher company, head of retirement consulting, Vishal Makkar, pointed out that the recently announced DB funding regulations are enabling schemes in surplus to contemplate higher risk investment strategies for those surplus assets, together with removal of the requirement for broad cash flow matching, both giving schemes more investment freedom.
"This potentially could increase immediate asset returns for pension schemes but also unlock new assets for investment on a long-term basis," he continued.
“It is worth noting, however, that any strategic decision should be in line with a scheme’s risk appetite, protect any liabilities, and meet its future cash flow and liquidity requirements.
"For schemes in a deficit, there is an inherent pressure to enhance the financial stability of the scheme, potentially resulting in more contributions for sponsors, which must be considered alongside its investment strategy.”
UK DB pensions increasingly well-funded amid sustained rise in AA corporate bond yields
Defined benefit (DB) pensions in the UK will look increasingly well-funded as the rise in AA corporate bond yields is sustained, according to a report by Bloomberg Intelligence (BI).
It noted that insurers were set to benefit as they assist companies in offloading their pension liabilities.
Following the increased volume of buy-in and buyout activity last year, this trend is likely to continue in 2024 as bond yields have recovered and stabilised, the report said.
Under the IAS 19 rule, AA+ corporate bond yields that are used to discount DB pension liabilities are up “sharply” year-on-year.
Yields have steadily increased since July 2021 and, while there has been some volatility this year, higher average yields were likely the “new normal”.
The rise has outpaced the spike observed amid Covid-19, which drove yields up sharply in March 2020.
The improvement in AA corporate bond yields was driven by rising interest rates combined with geopolitical uncertainty, according to BI.
Commenting on the report, BI senior industry analyst (insurance), Kevin Ryan, said: “It's clear that many companies view staff pensions as both a distraction and unwelcome liability, so we expect the trend to outsource the liability to continue.
“This is broadly good news for insurance companies with two sources of profit: Underwriting and investment income.
“Many companies' DB plans should begin to appear better funded, making these more attractive to the buy-in, buyout market.
“Still, challenges remain, with insurers uniquely qualified to manage them for pension fund clients.”
This story originally appeared on our sister website, Pensions Age.
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