There has been a £20bn decrease in the size of the deficit of defined benefit (DB) pension funds over the past month, which now stands at £500bn, according to analysis by PwC which warns the improvement may only be temporary, as the result of the way in which yields are calculated
PwC’s Skyval Index provides an aggregate health check of the UK’s approximately 5,800 DB pension funds.
Steven Dicker, PwC’s chief actuary, said the deficit reduction 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,’ he said.
Dicker warned that now the Brexit process has officially started, pension schemes face two years of uncertainty and potentially volatile deficits. He pointed out that this will add to the challenge of long-term planning, especially when using a market 'snapshot' approach for actuarial valuations, as is usually the case.
Dicker said: ‘Many schemes will be considering alternatives to the traditional "gilts plus" approach to try to get a clearer picture of their liabilities.’
