As pensions surplus passes £400bn, it’s time to consider barriers to access, says PwC

PwC’s Low Reliance Index shows a record surplus this month, hitting £400bn for the first time. This index assumes schemes invest in low-risk, income-generating assets like bonds, which should mean the pension scheme is unlikely to call on the sponsor for further funding.

The UK’s 5,000 corporate defined benefit (DB) pension schemes on average continue to have a significant surplus above the expected cost of ‘buyout’ of their pension promises, according to PwC’s Buyout Index, which recorded a surplus of £255bn in May. 

As the high levels of surplus for schemes continue to increase, so too do questions of how best to use these to benefit members and sponsors.

John Dunn, head of pensions funding and transformation at PwC UK, said:

“With funding levels of the UK’s DB schemes recording a record level of surplus of £400 billion on our Low Reliance Index this month -  the debate around how to best utilise this surplus is intensifying. From the sponsor’s perspective, the surplus is often ‘trapped in the trust’ and new rules are needed to allow surplus to be released while the scheme is ongoing. There are further barriers to giving surplus to members by increasing pensions, through accounting rules that determine how ‘discretionary’ pension increases are treated in the sponsor’s books.”

Brian Peters, head of pensions financial reporting and partner at PwC, added:

“Using surplus to grant members additional pensions would typically result in a P&L (profit and loss) charge for the sponsor under the current UK and International accounting standards. In our discussions with sponsors, any P&L hit is often a complete red line - which can take additional ‘discretionary’ pension increases off the table, even if they are paid out of the pension scheme’s surplus assets.  

“The accounting standards setters are unlikely to change established rules and practice so companies will need to balance the accounting treatment of granting additional benefits to scheme members against the extent to which the company and members will also benefit from the release of surplus. Understanding and communicating the potential impact on the P&L will be key to helping companies assess the merits of different ways of using surplus that has built up in their pension scheme.”

The PwC Low Reliance Index and PwC Buyout Index figures are as follows: