Pension scheme surpluses maintained despite market volatility

Pension scheme surpluses maintained despite market volatility

04 Jul 2023

• XPS Pensions Group estimates that the aggregate surplus of UK pension schemes now stands at approximately £131bn.
• Long-term gilt yields fell slightly by 0.1% over the month which led to a slight increase in the value of liabilities, slightly worsening the funding level of schemes.
• However, aggregate scheme assets were slightly up over the month, helping to ensure that the large surpluses many schemes have recently built, were maintained.
• Schemes must increasingly decide what actions they should take to manage these surpluses.

Across June 2023, UK pension schemes’ funding positions have fallen by c.£9bn against long-term funding targets. Based on assets of £1,422bn and liabilities of £1,291bn, the aggregate funding level of UK pension schemes on a long-term target basis was 110% as of 27 June 2023.

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Peter Black, Partner at XPS Pensions Group and Head of Surplus Consulting said: “After many years addressing deficits in defined benefit (DB) pension schemes, employers are now faced with a new issue to consider: managing surpluses. One element of this from a sponsor point of view is to manage the risk of unwanted surpluses arising using levers such as escrow accounts for future contributions, asset backed funding arrangements and a general review of investment strategy.

On the other hand we are now seeing some employers actively making the decision to run on their schemes. This can generate “responsible” surpluses for the benefit of both the employer and scheme members, for example by funding discretionary pension increases.

When a surplus has arisen, there are a number of options to use this efficiently. We have recently helped a corporate client use a very substantial surplus towards future DC accrual as well as funding a deficit in another DB scheme within the group.”

Notes:

XPS DB:UK tracks the funding position of UK defined benefit (DB) pension schemes on a long-term target basis and allows real time monitoring of changes and analysis of the reasons behind any movement.

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/