PPF 7800 Index: Inflation 'dip' and equity rally helps to boost pension surplus by £9.1bn

The funding ratio increased from 145.8 per cent at the end of June 2023 to 146.4 per cent, with the number of schemes in surplus rising to 4,673 from 4,652.

Total assets of eligible defined benefit schemes - on a section 179 basis listed in the PPF 700 Index were £1,407.5bn and total liabilities were £961.4bn, there were 458 schemes in deficit and 4,673 schemes in surplus.

The deficit of the schemes in deficit at the end of July 2023 was £2.2bn, down from £2.3bn at the end of June 2023.

Interest rates

Sion Cole, head of UK fiduciary business at BlackRock, said defined benefit schemes have continued to ride out the confluence of both high inflation and market concerns around continued rate rises.

He said gains could be attributed to an improved level of investor sentiment across financial markets aided by a softening in UK inflation last month.

"[This lead to] some investors to believe that developed economies can achieve a soft landing through less aggressive central bank rate hikes. Further, pension scheme assets were boosted by a rebound in growth assets, such as equities, which continued to rally over the month. 

He added that markets were now pricing that the Bank of England will trade off growth to continue raising rates to above six per cent. "Schemes face a new macro regime that, while challenging, provides opportunities to continue shoring up their funding positions. That said, most schemes are well positioned to hold tight in an environment of stickier inflation and elevated rates. Amid these conditions, we expect well managed, diversified schemes to begin outperforming schemes that have been slower to adapt.

“On a longer-term horizon, we see strategic opportunities in private markets. Private credit is particularly benefiting from higher yields, while having greater downside protection than other risk assets. In the current environment, this is crucial to maintain a balanced portfolio.”

Kieran Mistry, senior business development manager at Standard Life said funding positions remained stable at the end of July 2023, despite bond yields and inflation levels falling slightly.

“The outlook for the second half of the year looks positive and there are no signs of activity slowing down. We anticipate an increasing number of schemes will approach and engage with insurers as a result of accelerated funding levels, making for a very busy market.

"For schemes seeking to reduce risk and benefit from the gains made over the first half of the year, insurance via bulk annuities remains the safest and most effective option to provide certainty and security for members. Thorough preparation therefore remains vital to secure the best opportunity in what is set to remain a very busy market.”

Trustee preparation

Jaime Norman, senior actuarial director at consultancy Broadstone, said the economy was entering a new cycle which presented both opportunities and challenges for pension schemes and their trustees.  

He said: “Persistent inflation is starting to come down and economists forecast that we are nearing the end of the Bank of England’s rate hiking. Growth assets delivered positive performance through the month as the market becomes increasingly optimistic that a recession is looking less likely as inflation starts to come under control. 

“The second half of the year is therefore a crucial time for pension scheme trustees to take stock, particularly given many will have significant improvements in their funding position over the past 18 months. Their job now will be capitalising on the market environment either by rapidly pursuing their end-game objectives or assessing the suitability of their investment strategy to the current economic situation. 

 “In such a congested market, trustees will also need to ensure their data and administration is in good order to make their scheme as attractive as possible to insurers.”