Combined deficit of defined benefit pension schemes in the UK dropped to £500bn by the end of March

 
Grace Black
Hand holding out money
Over £230bn could be shaved off pension fund deficits by refining the approach to life expectancy projections (Source: Getty)

The combined deficit of defined benefit pension schemes in the UK dropped to £500bn as of the end of March, down £20bn on the previous month, according to a new report.

The PwC research showed that defined benefit schemes, of which there are around 5,800 in the UK, had aggregate assets of around £1.53 trillion compared to liabilities of £2.03 trillion.

However, the fall follows a huge rise in pension fund deficits during 2016, which saw the gap between assets and liabilities hit an all-time high of £710bn in late August.

“Now the Brexit process has officially started, pension schemes face two years of uncertainty and potentially volatile deficits,” said Steven Dicker, PwC’s chief actuary. “This only adds to the challenge of long-term planning, especially when using a market 'snapshot' approach for actuarial valuations.”

Read more: This Australian pension giant wants to buy the M6 toll road

This volatility has been evidenced through the deficit swings so far this year. By the end of January the gap had fallen to £470bn, before climbing again in February to reach £520bn.

According to Dicker, the most recent drop in deficit was mainly due to “a decrease in assumed inflation, reflecting movement in the published yields often used to set this assumption”.

He highlighted that the figures could be counterintuitive, as inflation is expected to rise further.

This may lead schemes to consider an alternative to the dominant 'gilts plus' approach for determining a funding discount rate, which relies on taking the market yield on gilts and adding a margin allowing for expected asset outperformance over this yield.

Read more: Revealed: Sir Philip Green's growing Arcadia pension deficit

The main alternative, Dicker said, would be an asset-led approach to determining the discount rate based on what the fund actually holds.

Earlier this year, PwC noted that £230bn could be shaved off pension fund deficits by refining the approach to life expectancy projections. The sum related to predicted improvements a long way into the future, and need not be pre-funded over the next decade – especially since the rate of increasing life expectancy appears to be slowing.

Last month, PwC predicted it would take until 2050 to halve the value of defined benefit liabilities, which stood at £2.04 trillion as of the end of February.

Related articles