Pension scheme consolidation expected to continue into 2024, as PwC analysis shows funding remains strong

The UK’s 5,000 corporate defined benefit (DB) pension schemes recorded a near record surplus of £245bn in November, according to PwC’s Buyout Index, showing that schemes continue to have sufficient assets on average to ‘buyout’ their pension promises.

Meanwhile, PwC’s Low Reliance Index has had a record month with a surplus of £380bn. 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.

As a result of improved funding levels schemes are increasingly simplifying their investment strategies, which is driving significant consolidation of pension scheme assets.

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

“This month was far from quiet on the pensions front, with a raft of ambitious proposals set out in the Autumn Statement. Funding levels, on the other hand, have remained broadly unchanged, with DB schemes remaining in a strong surplus position. It’s worth noting that, after the change to the surplus refund tax announced in the Autumn Statement from 6 April next year, the value of the net buyout surplus to scheme sponsors has just increased by up to £25 billion. 

“Many of the Chancellor's plans build on his Mansion House speech which, in part, focused on the consolidation of pension schemes. On the asset side of the balance sheet, we are already seeing significant consolidation - more than 80% of the UK’s DB scheme assets are held by less than 10 asset managers. Yet we may see further consolidation; the pool of DB assets has shrunk by around 25% over the past two years, and trustees are adopting simpler, less fee generative strategies, and as a result managers have seen aggregate monetary fee amounts fall.”

Keira-Marie Ramnath, head of investments at PwC, added:

“Asset management has been consolidating for a number of years now. One reason for this  has been the rise of fiduciary management, where a provider bundles other services like advice alongside ‘running the money’. However, in the last two years, a big driver of further consolidation has been the de-risking and simplification of investment strategies. You might expect this to lead to fiduciary manager fees reducing as a percentage of assets under management, but this is not the case - in fact, we are seeing fiduciary manager fees on the rise. In part, this is being driven by rising costs due to inflation impacting their business expenditure, but also an increase in the services that fiduciary managers need to provide, for example in response to regulatory requirements.

“The trend of consolidation is not unique to the pensions industry. Our recent Global Asset & Wealth Management Survey highlighted that 73% of asset managers are considering a strategic consolidation with another asset manager in the coming months in order to gain access to new segments, build market share and mitigate risks. Given the benefits that can be achieved, we expect the market to continue to grow.” 

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