DB schemes: PPF 7800 Index records highest ever surplus

The combined surplus of defined benefit pension schemes potentially eligible for entry to the Pension Protection Fund (PPF) grew by just over £6bn between June and May, while the funding ratio increased from 145.1 per cent at the end of May 2023 to 145.8 per cent.

The PPF 7800 inde gives the latest estimated funding position for all eligible defined benefit schemes on a section 179 basis. It found that total assets of the funds were £1,390.3bn and total liabilities £953.3bn;there 479 schemes in deficit and 4,652 schemes in surplus.

The total deficit of the schemes in at the end of June 2023 was £2.3bn, down from £2.4bn at the end of May 2023.

Shalin Bhagwan, newly appointed PPF chief actuary said: “The 7800 index registered two records this month – the highest ever aggregate surplus and lowest ever shortfall for schemes in deficit, since the 7800 index was first published in 2007.

"This has ultimately resulted in a slight improvement in the funding ratio by 0.7 percentage points to 145.8 per cent, a substantial increase on a funding ratio of 122.0 per cent at the end of June 2022.

"These figures suggest improved funding levels across defined benefit pension funds and were principally driven by returns on equity markets, with UK and overseas equities registering month-on-month returns of one per cent and three per cent respectively. Higher gilt yields over June also meant a small reduction in liabilities and this was another driver of the improved funding position.”

Interest rate expectations

Kieran Mistry, senior business development manager at Standard Life said the increase followed a continued rise in interest rate expectations in response to persistently high levels of inflation.

He said: “For schemes with a funding surplus, focus has naturally been on how to lock in these gains, with many considering securing members’ benefits through an insurance buy-in or buyout. However, with many schemes ahead of schedule when it comes to their de-risking journey, the market is experiencing unprecedented high levels of demand. This means it is crucial that trustees ensure they are sufficiently prepared to ensure they maximise value when approaching the market.  “Additionally, while some schemes with no realistic prospect of buying out in the insurance market may benefit from the potential creation of a new permanent superfund regulatory regime, as announced via a Consultation published by the UK Government today, insurance via bulk annuities remains the ‘gold standard’ for most schemes when it comes to de-risking and maximising member security.”

Spectre of LDI crisis

Vishal Makkar, head of retirement consulting at Buck in the UK, said the overwhelming majority of the schemes in the index were in surplus, in a healthy funding position. "But this doesn’t mean that the rest of the year will be plain sailing. “With gilt yields rising yet again, we may now see cash management and collateral calls come back into focus.

"Last year’s LDI crisis continues to cast a long shadow and there are clearly lessons to be learned for the future. The House of Commons Work and Pensions Committee released its long-awaited LDI report at the end of last month, which contains a number of recommendations for schemes and is important reading for trustees.

"Similarly, the Mansion House reforms set out by the Chancellor this week suggest there may well be more governance work for trustees to address this year. “Speaking with experienced advisers and specialists can be a useful first step for any DB scheme trustees who are unsure about what these changes might mean for them.”