DB schemes maintain strong funding position through January

Inflation and rising bond yields kept defined benefit (DB) schemes in a strong funding position through January, according to the Pension Protection Fund (PPF). 

However, the fund’s chief actuary warned that volatility and portfolio complexity remain issues for scheme endgame planning. 

The PPF’s latest update on its 7800 index of private sector DB schemes found that the aggregate surplus decreased slightly to just over £425bn at the end of January. However, the overall funding ratio rose from 142.8% at the end of 2023 to 143.9% as of 31 January. 

Shalin Bhagwan, the PPF’s chief actuary, said: “The marginal changes to aggregate surplus and funding ratio somewhat mask the relatively large increase in bond yields over the month – this was driven by stronger-than-expected inflation data in the UK impacting the markets expectations about the pace of rate cuts by the Bank of England, as well as increased issuance from both governments and corporate borrowers.  

“Volatile bond markets vindicate higher collateral buffers which, coupled with the ongoing private market denominator effect, appears to have added to the complexity of formulating an appropriate endgame plan and a corresponding investment strategy.” 

Jaime Norman, senior actuarial director at Broadstone, said the continued strong aggregate funding position added to expectations of “another record year of derisking” in 2024. 

“Despite this increased ability [from insurers] to meet derisking demand, schemes still need to sure they have best-in-class administration, excellent data and meticulous preparation before approaching the market,” he added. 

Charlotte Fletcher, business development actuary at Standard Life, agreed, adding: “In this market environment, trustees and sponsors will likely be looking towards the budget next month, when changes that impact schemes may be announced.  

“However, looking ahead to the next few months, activity levels are showing no signs of slowing down, and it is anticipated that 2024 volumes will again be record-breaking.”  

Supply in the bulk annuity market is expected to increase this year, with two new insurers expected to enter the market and more large deal predicted. 

In addition, higher bond yields are expected to increase capacity for insurers to take on more DB liabilities, according to new research by Bloomberg Intelligence.  

The 5,050 schemes in the PPF 7800 index had aggregate assets of £1.4trn, and combined liabilities of £970bn. Of these schemes, the PPF said 599 were in deficit and 4,451 were in surplus. 

Vishal Makkar, head of retirement consulting at Buck, highlighted imminent rule changes that could change how schemes approach surpluses. 

“The recently announced DB funding regulations are enabling schemes in surplus to contemplate higher risk investment strategies for those surplus assets, together with removal of the requirement for broad cashflow matching, both giving schemes more investment freedom,” he said. “This potentially could increase immediate asset returns for pension schemes but also unlock new assets for investment on a long-term basis.”