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:

ENDS

Notes to editors:

1. The PwC Indices measure the aggregate funding position of the UK's defined benefit schemes. The Low Reliance Index uses a discount rate assumption of gilt yields plus 0.5% pa. “Gilts plus” measures are often collectively referred to as funding targets where there is a low level of reliance on the company that ultimately supports the scheme.  The Buyout Index reflects PwC’s view of indicative market pricing based on their current experience of completing buy-in and buy-out transactions2

1. The PwC Indices focus on liability value measures which schemes may be targeting in the long-term. These differ from other liability value measures, for example, those used for the purposes of preparing accounting disclosures or for the calculation of the levy payable to the Pension Protection Fund.
   

2. The PwC Indices covers the whole universe of around 5,000 UK defined benefit pension funds. Some other market trackers cover just a minority subset (e.g. fewer than 10% of schemes), so may show different trends.

3. The estimated asset value for the UK’s defined benefit pension schemes is based on monthly data from the PPF 7800 index, tracked over each month based on the movement in asset indices using data provided by Refinitiv. 

4. PwC experts are available for interview - please contact Kevin Scott on +44 7561 789 014 /  kevin.y.scott@pwc.com or Hannah Brook on +44 7483 421 730 / hannah.brook@pwc.com