Defined benefit pension scheme surplus could be used to improve overall pensions wealth

The funding status for the 5,000-plus UK corporate defined benefit (DB) pension schemes continues to show that on average schemes have sufficient assets to ‘buy out’ their pension promises with insurance companies, according to PwC’s Buyout Index.

A rise in long-term bond yields saw the estimated buyout cost fall in April, while asset values broadly held up, resulting in an increase in the surplus recorded by the Buyout Index to £160bn.

PwC’s Low Reliance Index also continues to show a healthy surplus of £320bn. This tracks the position of the UK’s DB schemes based on a low-risk income-generating investment strategy, which should mean the pension scheme would be unlikely to call on the sponsor for further funding.

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

“We continue to find that the UK’s DB pension schemes are in good health. A debate about who will benefit from this surplus is on the horizon, with candidates including insurance companies, the companies that sponsor these schemes, and the members, who are typically the Baby Boomer and Gen-X cohorts.

“With Millennial and Gen-Z workers in the private sector typically having lower defined contribution (DC) savings, an argument could be made for an intergenerational transfer. Overall pension wealth could be improved by boosting the pensions of younger workers using the surplus assets which are now not required to provide secure pensions for the older generations.”

Roshni Patel, DC pensions and benefits lead at PwC, added:

“For every private sector employee that participates in a DB pension scheme, there are at least five others contributing to their employer’s DC pension arrangement. DC savers typically have much lower pension values than those in DB schemes, and a lot of them could be at risk of not having enough put aside for a comfortable retirement.

“It’s also been estimated that about one fifth of private sector employees aren’t saving anything for their retirement. We’ve recently seen an increasing trend of people opting out of DC pension schemes or reducing their contribution rates, which will only act to increase the intergenerational disparity. The proposed forthcoming changes to auto-enrolment regulations will bring a new and younger generation into scope, those aged between 18 and 22. This could be a great first step towards reducing the intergenerational pensions gap.”

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