DB pension surplus hits £40bn

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The overall defined benefit (DB) pension surplus in the UK continued to grow last month, standing at £40 billion at the end of February 2022, according to the PwC Pension Funding Index.

This represents an improvement of £10bn on the previous month, based on assets of £1,730bn, up from £1,780bn at the end of January 2022, and liabilities of £1,690 sterling, down from £1.75 trillion in January 2022.

PwC’s Adjusted Funding Index, meanwhile, which incorporates the strategic changes available to most pension plans, including moving away from low-return golden investments in favor of higher-yielding, revenue-generating assets. income, and a different approach to potential changes in life expectancy, remained at a surplus of £200bn.

This figure also incorporates the strategic changes available to most pension plans, including a move away from low-yielding golden investments in favor of higher-yielding, income-generating assets, and a different approach to potential changes in the ‘life expectancy.

Commenting on the latest update, PwC’s global head of pensions, Raj Mody, noted that pension schemes generally remain well funded based on their own valuations for funding purposes, despite volatility and market disruptions. in February.

“Many sponsors and administrators are now reviewing their travel plans – their long-term goals and how they are going to get there,” he continued.

“Those focused on securing member benefits for good might find that they are closer to that goal than they think. They must be careful not to accumulate more money than necessary because there have been many situations of overfunding and loss of value in the process of transfer to a third party.

PwC also previously noted that DB plans have remained out of the overall deficit for the past 12 months, pointing to this prolonged period of surplus as a demonstration that well-funded plans that wish to transfer to a third party, such as an insurance company, are close to being able to do so.

However, the company clarified that further assessments of their position remain useful, noting that trustees and sponsors should remain focused on the metrics that best align with their plan-specific strategy.

Swapnil Katkar, head of pension risk transfer at PwC, said: “For plans planning to transfer their pension risk to a third party, traditional measures of their funding, such as technical reserves or solvency, may not suit them. give the best indication of the market price situation. and how it moves.

“For example, insurance companies typically invest a large amount in credit assets like bonds. Their pricing will depend on the returns they can generate in the market and are therefore strongly influenced by the credit spreads on these assets.

“Systems considering other market solutions, such as consolidators or third-party capital-backed solutions, would require different metrics depending on the target investment strategy and vendor-guaranteed returns. If the systems focus on metrics that align with their target strategy, then they’ll have a better chance of being ready to trade when the time is right.”

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