UK pension fund deficit falls to £500bn, according to PwC’s Skyval Index

New figures released today from PwC’s Skyval Index show the deficit of defined benefit (DB) pension funds stood at £500bn at the end of March 2017, a £20bn decrease since last month.  

PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.5,800 DB pension funds.  The current Skyval Index figures are:

The funding measure is the approach used by pension fund trustees to determine company cash contributions (see notes to editor for definitions on deficit measures).

Steven Dicker, PwC’s chief actuary, said:

"Despite only small market movements over the last month, the overall deficit has fallen by £20bn to £500bn.  This was mainly due to a decrease in assumed inflation, reflecting movement in the published yields often used to set this assumption.  This highlights how sensitive measurement of pension liabilities is to even modest changes.  It can also be counterintuitive, as inflation is expected to rise further.  

Now the Brexit process has officially started, pension schemes face two years of uncertainty and potentially volatile deficits.  This only adds to the challenge of long-term planning, especially when using a market 'snapshot' approach for actuarial valuations.  Many schemes will be considering alternatives to the traditional "gilts plus" approach to try to get a clearer picture of their liabilities."

Ends

 

Notes to editors

• Steven Dicker is available for interview - please contact Katherine Howbrook on 020 7212 2711/07595 609 737 or [email protected]

Notes on deficit measures:

• Funding: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor.

 

• The “funding measure without extended allowance for future longevity improvements” adjusts for the following issue: Pension fund trustees typically make an allowance for life expectancy to continue to improve a very long time into the future. However, these pension payments are not yet a commitment - they are just a prudent expectation of what might unfold over the next few decades. This adjusted funding measure recasts the deficit by removing this additional allowance for life expectancy improvements, which haven’t yet happened.

 

• Example: If a man aged 40 today is projected to live to 85, but that ends up looking more like 90 thanks to medical or health improvements, that extra commitment isn't going to be due until 45 years from now.  Similarly, a woman aged 40 now may be expected to live to 87, but could eventually live to 91.  Those extra years of pension in 50 years time, in this example, may not need to be pre-funded now.

 

• Accounting: the target value of liabilities shown in company accounts, based on formal accounting standards which assume asset returns in line with AA-rated corporate bond yields. Pension decision-makers should not rely on the accounting measure to inform their management decisions.  Accounting numbers not designed to be tailored to individual pension fund circumstances.  They are not in isolation a good basis for deciding the best future strategy for a pension fund's assets and liabilities.

 

• Buy-out: the value an insurer would typically place on the fund's liabilities, which depends on prevailing market terms for these kinds of transactions. It is a hypothetical scenario for all pension funds to buy out their total liabilities in one go as there is not enough capital market capacity to support this. The theoretical deficit on such a buy-out basis would be in excess of £1trn.

 

• Figures provided have been estimated by PwC and Skyval based on publicly available data of UK defined benefit pension funds, including from the Pensions Protection Fund’s dataset.

 

About Skyval

Skyval is a pensions platform which trustees, sponsors and all advisers can use for their pension scheme, as a single and confidential tool for their scheme-specific funding, investment, analytics and benchmarking requirements.

The Skyval suite of modules includes Skyval Dashboard, Skyval Monitor, Skyval Choice, Skyval Optimiser, Skyval Accounting and Skyval Insure. Skyval helps pension schemes reduce costs, manage risks and make better decisions faster. Visit www.skyval.com, follow @SkyvalOnline or connect on LinkedIn