More than nine out of 10 DB schemes have seen their asset base reduce as a result of falling bond prices and last year’s LDI funding crisis according to new research from PwC.
However. despite this, the vast majority are reporting improved funding levels – in other words they are in a better position to meet their pension liabilities. This is due rapidly increasing long-term gilt yields, which effectively reduce the assessed cost of providing longer-term pension promises.
As a result of this improved funding, the survey revealed that 30 per cent of schemes have now reached their long term funding target — three times the figure that were at this point in 2022. Many are now rethinking investment strategies as a result.
Looking in more details at these figures, the PwC research found that more than half of schemes reported assets falls of between 20 and 40 per cent, with a further 7 per cent seeing assets fall by between 40 and 60 per cent, when compared to a year ago. Only 7 per cent of schemes have seen an increase compared to 12 months ago.
When it comes to funding levels — a calculation of whether there are sufficient assets to pay pension liabilities — 10 per cent of schemes saw their funding level fall, with most of these (9 per cent) reporting a deterioration of up to 15 per cent lower than a year ago. Just 1 per cent reported a larger deterioration.
PwC said these 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.
In contrast almost, three quarters (74 per cent) of schemes surveyed saw an improvement in their funding, with 61 per cent of schemes seeing an improvement of up to 15 per cent and a further 13 per cent seeing a significant improvement of 15 per cent and over.
Measured against schemes’ own long term funding targets, PwC said 30 per cent had met these targets. In total almost a quarter (23 per cent) of schemes are funded between 100 per cent-110 per cent, and a further 7 per cent are funded above 110 per cent.
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. This could lead to a sell-off of less liquid assets, which could affect pricing, although it comes at a time when many DC schemes are looking to increase allocations to these area.
PwC head of pensions funding and transformation John Dunn says: “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.”