Charlotte Fletcher, Business Development Actuary at Standard Life, part of Phoenix Group: “Funding levels for UK defined benefit pension schemes experienced yet another rise in May. The aggregated section 179 funding ratio for the 5,050 schemes included in the PPF 7800 Index reached 149.4 per cent at the end of May 2024, up from 148.8 per cent at the close of April 20241.
“This latest PPF update shows funding levels for DB pension schemes remain robust, with many schemes in a position to look to de-risk with an insurer. However, with the European Central Bank cutting interest rates last week, pressure is mounting for the Bank of England to follow suit which may cause a period of fluctuation in scheme funding positions. The upcoming UK General Election is also adding to this degree of uncertainty as schemes look ahead to what the future might bring.
“The risk transfer market remains busy and is showing no signs of slowing, and with increased affordability, insurance remains the primary de-risking solution for many trustees and sponsors. Against this backdrop, diligent preparation, as well as early insurer engagement, remains vital in order to successfully navigating this busy market and ensure the best outcome for members’ benefits.”
Sarah Elwine, Actuarial Director at leading independent consultancy Broadstone, commented: “The shock announcement of a General Election towards the end of May did little to alter the current positive stability of defined benefit pension scheme funding.
“A new government is likely to inherit a funding environment characterised by surplus when it comes to office in July, following two years of drastic improvements as interest rates rose. This steadiness in the market should help drive long-term, cross-party policymaking that supports well-funded schemes as well as those where there is still work to be done.
“Whilst the election campaign has paused progress in creating a public consolidator, we hope that once the new government is formed, these plans can continue, providing additional end game options for smaller pension schemes.
“Despite the uncertainty of the election, it is important that trustees and sponsors continue to prioritise the same long-term objectives. This includes managing funding and investment risk to reduce volatility, ensuring good quality administration to keep members safe and happy, and appointing advisers that provide value for money.”
Sion Cole, Head of European Institutional OCIO at BlackRock, said: “The aggregate surplus of schemes rose by £10 billion from £458.3 billion at the end of April to £468.8 billion at the end of May. We’ve now seen surpluses increase by over £40 billion since the end of January. The rise in May continues the trend of positive funding, re-enforcing the opportunity for managers and trustees to shore up their positions.”
“In this environment, schemes are better positioned to explore investment opportunities, opening the door to potentially return surplus funds and improve member benefits.”
“As inflation stands within a whisker of the 2% target, we expect the BoE to follow suit with the ECB’s decision last week to lower rates. Our base case remains for the Bank of England to cut rates this year, likely following the July election – presenting opportunities for UK gilts. Scheme trustees will need to navigate uncertainty as they consider their risk profile and long-term objectives to ensure funding and investment decisions are correctly aligned.”
Vishal Makkar, Managing Director, UK Wealth Consulting at Gallagher, said: “In May, the PPF 7800 Index dug its heels into a robust holding position, as the total number of DB schemes in surplus only increased by a modest 29 with a corresponding fall in the number of schemes in deficit. The Index ventures into June in a further fortified position; the total surplus climbed by £10.5bn, with the overall funding ratio increasing from 148.8 per cent in April to 149.4 per cent in May. Over May asset values increased by around £20bn with liability values only increasing by around half as much.
“Following an upward trend in scheme funding levels over the past few months, it stands to reason that many trustees will be keen to lock in their endgame plans before the current positive trajectory starts to plateau. The market has settled into a stable phase, but trustees must not shirk their obligations to the members. The TPR is unequivocal: the highest-performing schemes should be progressing their plans to execute buyouts, run-ons, or moving to a consolidator.
“Given the current regulatory environment, it is vital that trustees approach any endgame scenario with an appropriate level of governance. Each DB scheme is a unique proposition, with its own specific operating requirements, and so trustees should submit every administrative practice to a standardised and rigorous evaluation process. In the gradual run-up towards buyout, DB schemes must put forward tailored investment strategies to maintain funding levels in a very dynamic period for the sector.”
View the June update and see the supporting data on the 7800 Index for 31 May 2024 here: The PPF 7800 index | Pension Protection Fund
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