Asset and liability values both fell over April 2022, resulting in a modest increase in surplus to £130bn based on schemes’ own ongoing funding measures. PwC’s Adjusted Funding Index shows a £270bn surplus - this incorporates strategic changes available for most pension funds, including a move away from low-yielding gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes.
Raj Mody, global head of pensions at PwC, said: “The surplus trend continues for UK pension schemes and, with inflation still rising, this trend is set to continue. Most pension scheme benefits are linked to inflation, but there’s usually a maximum increase that will be paid each year for members. Around nine out of 10 schemes have limits on how much inflation they pass into pension increases. For nearly all of these 4,500 schemes, this cap will be lower than the current rate of inflation, and so their liabilities will not be fully exposed.
This gives them a buffer on top of existing surpluses. Even schemes with a modest deficit might well reach surplus by just waiting.
There’ll be a few exceptions, including schemes who have put in place insurance or hedging, when a third party will get the advantage from any inflation cap, instead of the scheme.
“Of course, caps on pension increases don’t only have an impact at the scheme level - they will also affect pensioners. Pension increases in defined benefit schemes are also typically only granted once a year, with reference to historic levels of inflation.
Pensioners may well need to wait another year until their benefits catch up with the current inflation rates we’re seeing today. There’s a lag effect which doesn’t matter in times of stable and low inflation, but can hurt in times of high and unpredictable inflation.”
Laura Treece, pensions actuary at PwC, added: “Pension increases being based on historic levels of inflation doesn’t only impact pensioners in defined benefit schemes. Anyone who gets the state pension will see this in the increase they received in April. State pensions went up by 3.1% - less than half of the inflation rate recorded for March of 7%. And with inflation predicted to keep rising, the extra money going into pensioners’ pockets won’t cover the amount by which their bills are going up now in line with current inflation.
“It’s a tough situation for a lot of people. We’re seeing sponsors and trustees think about how they might help their pensioners. Some are actively considering paying discretionary top-ups to pensions if the high inflation rates we’re seeing continue. This is something we haven’t seen much of recently - discretionary increases were more common in the 1990s when there was no compulsory requirement for pension payments to go up each year. We may start to see more and more schemes bringing back this practice if inflation remains high.”
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