Defined benefit pension deficits recovered by £60bn in October, but funds are still more than £600bn in the red, according to data from PwC.
DB scheme deficits reached a record high of £710bn in August, but have now fallen for two consecutive months to reach £630bn – as measured by the value of liabilities used by pension fund trustees to determine company cash contributions.
PwC global head of pensions Raj Mody says though improving gilt yields had eased pressure on deficits, the deficit reduction may prove to be short-lived.
He says: “Slight improvements in gilt yields have contributed to the apparent deficit reduction, but liability measurement by gilt yields does not necessarily represent reality, given pension liabilities are mainly affected by longevity and inflation.”
A parliamentary hearing is currently investigating how to deal with DB deficits in the UK.
Mody says: “Companies and trustees should first look at pensioner liabilities and consider taking these off their balance sheet. Otherwise they are gradually turning into an annuity provider, which would seem odd, unless that is their business. Instead, they could take steps to avoid their pre-retirement liabilities turning into post-retirement liabilities.
“Insurance at the right price could be an option as new technology provides early visibility of scheme-specific pricing. Schemes can carry out a transaction as and when there is a favourable pricing window.
“There are plenty of ways to reshape and optimise liabilities in the run-up to members’ retirement. Only offering one option at retirement – to swap a quarter of your pension for a lump sum – is outdated. In this age of freedom and choice, with possibilities such as flexible retirement options, a range of more modern choices can be presented to savers.”