“2020 saw another fall in the proportion of the UK’s defined benefit schemes in which there are benefits still accruing, from 52% as of 31 March 2019 to 50% by 31 March 2020, with only 1m individuals accruing defined benefits. These members make up less than 10% of total private sector DB scheme membership.?As a result, many sponsors continue to consider how to manage the cost of new accrual, and schemes are increasingly focused on how to manage those benefits that have already accrued.
“It is perhaps no surprise that funding positions as of 31 March 2020 look much less favourable than those a year ago – with an overall deficit of more than £200bn, compared to £159bn as of 31 March 2019. This was a point when gilt yields were low and markets depressed, as the full effects of the pandemic began to impact the UK. Many schemes have seen their funding rebound since then, but the events of last year highlight how important it is for trustees and sponsors to monitor their funding position and have plans in place for when conditions change.
“It is interesting that the report does not include any updated analysis about the levels of inflation-linkage in pension schemes. Last year’s report showed that a significant percentage of members of defined benefit schemes have a form of RPI-linkage on some of their benefits and we expect this to still be the case. For example, over half of members with benefits accrued from April 1997 have pension increases linked to the RPI (in many cases with some cap on increases). The reform announced to RPI last year will affect those members’ future increases, with their future RPI-linked pension increases expected to be as much as 1% a year lower. This will significantly erode the value of many members’ pensions compared to previous expectations.”
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