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The UK’s pensions lifeboat has wiped £283bn off its estimates for the funding level of defined benefit pension schemes, but said their net funding position remained “strong”.
The Pension Protection Fund on Thursday dramatically reduced its calculation for the value of £1.2tn of defined benefit pension assets, adjusting 2023’s funding ratio on a buyout basis from 112 per cent to 90 per cent.
The change put schemes at a deficit of £133bn in 2023, from a previous estimate of a £150bn surplus. While the previous figures had placed the typical scheme in a position to secure their members benefits with an insurance buyout, that is no longer the case.
“The PPF refine their methodology each year, but to now ‘fess up that they’ve overstated assets by over a quarter of a trillion pounds, is hugely embarrassing,” said John Ralfe, an independent pensions consultant.
The pensions lifeboat said it had changed its methodology to “roll forward the assets and liabilities”, and to use more granular asset allocation data and take into account cash flows in and out of schemes.
Although the funding picture has improved in 2024, the buyout ratio was 94 per cent, representing a £69.5bn deficit.
The revision comes as companies have been rushing to pay insurers to take over the responsibility of their pension obligations, in a process known as “buyout”.
The level of DB pension — where employers guarantee an inflation-linked pension for life — sales to insurance companies reached a record £60bn last year, according to the PPF.
A rise in interest rates has improved the funding levels of pension schemes in recent years because higher bond yields, which are linked to rate increases, reduce the current value of their future pension liabilities.
While the PPF’s revisions to funding estimates were higher than pension experts expected, they said the buyout trend would continue as funding levels had improved and schemes were still in a healthy position.
Sir Steve Webb, former pensions minister and consultant at LCP, said it was “important not to draw the wrong conclusion” about the revised figures and that “the overwhelming story remains one of dramatic improvement in overall scheme funding”.
While the updated 2024 figures suggest there is a deficit for schemes to buyout in full across the industry, the section 179 basis — which indicates the funding level for the benefits covered by the PPF — remains in significant surplus of £219bn.
“As a result, this latest data is unlikely to raise concerns from the PPF or prompt a reassessment of the level of PPF levies required,” said Paul Kitson, head of pension consulting in the UK for EY.
