Over 90% of UK defined benefit pension schemes have seen asset bases reduce as result of the LDI crisis, but funding levels remain strong - PwC analysis

• 93% of schemes have seen their asset base reduce over the last 12 months as a result of falling bond and LDI prices 

• But only one in 10 of the schemes surveyed saw their funding level fall

• 30% of schemes have now surpassed their long-term funding target, and three out of 10 schemes have updated their long-term funding target in the last 12 months

More than nine out of 10 (93%) defined benefit (DB) pension schemes have seen a reduction in their asset base over the last 12 months as a result of falling bond and LDI prices, according to a new PwC survey. 

Despite the collective funding position of the UK’s DB pension schemes reaching record surplus levels this year, the LDI crisis has had a lasting effect on the asset base of the UK’s DB pension schemes. According to the survey, more than half of the pension schemes surveyed saw their asset value fall by 20-40%, with a further 7% seeing their asset value fall between 40-60%.  Only 7% of schemes have seen an increase compared to 12 months ago. 

The survey also shows that 10% of pension schemes saw their funding level fall in the last 12 months. With 9% of schemes reporting a deterioration of up to 15% lower and a further 1% reporting more than 15% lower. The fall can be attributed to these schemes having difficulties maintaining their hedging arrangements throughout the LDI crisis last year, which as a result, was detrimental to funding levels of some schemes. 

However, nearly three quarters (74%) of schemes surveyed saw an improvement in their funding, with 61% of schemes seeing an improvement of up to 15% and a further 13% seeing a significant improvement of 15% and over. This improvement in funding levels is largely driven by rapidly increasing long-term gilt yields, which reduce the assessed value of the liabilities as future pension payments are discounted at a higher rate. 

As a result of improved funding, the survey revealed that 30% of schemes have now reached their long term funding target, trebling from 2022. Measured against schemes’ own long term funding targets, nearly a quarter (23%) of schemes are funded between 100%-110%, and a further 7% are funded above 110%. The survey also highlights that schemes that are fully funded are reviewing their investment strategies, focusing on locking into improved funding positions and improving the liquidity of assets. 

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

“Our survey shows that despite a weaker year for pension scheme assets, the  consistently strong collective funding levels of the UK’s DB pension schemes appear to be the ‘new norm’.  As a result of the shift in market conditions, many trustees and sponsors have had to review their position, which they did not expect to contemplate for another decade, and think about what’s next in terms of end-game strategy. 

“When it comes to end-game options, we are seeing a mix of schemes rushing to get ready to join the insurance buy-out queue, whilst others are contemplating running off. Yet, following the Mansion House speech, an increasing minority of schemes are also starting to consider alternative solutions such as superfunds. Ultimately, all sponsors should think about the range of available opportunities to ensure the best possible long-term outcome for all stakeholders.”

Notes to the editor: 

1. The survey is based on data collected during June to August 2023 and received responses from schemes with assets of around £170 billion in total. The average scheme size is around £1.7bn.

2. The full report is available upon request.