Large accounting surpluses expected as strong scheme funding levels remain stable

Large accounting surpluses expected as strong scheme funding levels remain stable

09 Nov 2023

DB pension surpluses remained broadly stable, showing only a slight decrease over the month of October, and remaining elevated compared to recent years, analysis from XPS Pensions Group has found.

The pensions consultancy estimates that the aggregate surplus of UK pension schemes, when measured on a long-term target basis, stood at approximately £184bn as of 31st October, representing an aggregate funding level of 115%.

A slight rise in long-term gilt yields of around 0.1% led to a decrease in the value of liabilities, but a slightly higher decrease in the value of schemes’ assets driven by hedging strategies and poor performance of growth seeking assets mean that the aggregate scheme surplus was down by £3bn or 1.6% over the month.

This strong position is also reflected in an improved aggregate pensions balance sheet across UK schemes, which will be of interest to scheme sponsors as their financial year-end approaches. XPS’s analysis found that corporate balance sheets are projected to show an estimated aggregate pensions surplus of around £240bn at the end of October, an increase from £170bn as of 31 December last year. 

The impact on individual schemes will depend on scheme specifics, but based on interest rate changes and market movements to date, XPS expect that schemes that have hedged less than 100% of their accounting obligations are likely to see an improved accounting balance sheet position compared to last December.

Simon Reddish, Partner and Head of Accounting at XPS Pensions Group said: “These figures illustrate the difference between prudent long-term funding measures, used to determine the strategic direction for many schemes, and the fair value-based balance sheet position calculated using prescribed accounting standards.

This means that it is increasingly important for sponsors to investigate the key drivers of these differences and to understand the potential accounting impact of activities such as insurance transactions. This will avoid surprises and ensure that useful information can be provided to stakeholders.”

Notes:

XPS DB:UK Funding Watch monitors the combined deficit and funding level of UK defined benefit (DB) pension schemes (i.e. all registrable schemes - including hybrids) on a long-term target basis using a discount rate of Gilts + 0.5%. It combines XPS’s market leading Member Analytics and the award-winning journey planning tool, Radar, enabling real time monitoring of changes and analysis of the reasons behind any movement.

An online version of XPS DB:UK is available here:

https://www.xpsgroup.com/services/xps-pensions/xps-dbuk-funding-watch/