The PwC Buyout Index recorded a surplus of £120bn in March, with the drop in gilt yields driving a reduction of £40bn on the previous month. Meanwhile, the Low Reliance Index also continues to show a sizable surplus of £290bn. This index assumes schemes invest in low-risk, income-generating assets like bonds, meaning they are unlikely to call on the sponsor for further funding.

The resilience of pension schemes to short term market shocks is something the Pensions Regulator (TPR) highlighted in its draft Code of Practice on scheme funding. As a minimum, TPR expects trustees to model and ‘stress test’ the impact of the kind of event that might occur once every six years on their scheme’s assets and liabilities. In contrast, insurance companies need to demonstrate that they can withstand at least a one-in-200 year stress scenario.

John Dunn, head of pensions funding and transformation at PwC, said: “The resilience of the UK’s DB pension schemes is of vital importance. This is from the perspectives of their members who will rely on the scheme to pay out their pensions, the trustees that run the schemes, and the sponsors responsible for making good any deficits. Despite further market turbulence this month, we find that DB pension schemes have remained well funded and, according to our research, they still have a healthy surplus buffer. But how resilient are schemes to further market shocks?

“Our modelling shows that if we consider all schemes in aggregate, using either PwC’s Low Reliance or Buyout index, there is currently sufficient surplus to absorb the sort of negative event that might occur one year out of six. Of course, a one-in-six year stress isn’t that rare when you consider the long-term nature of pension scheme obligations that will run off over many decades, and this is only the minimum level of stress testing the UK Pensions Regulator is suggesting that trustees conduct.”

Laura Treece, pensions actuary at PwC, added: “This kind of ‘stress testing’ analysis is something that many trustees and pension scheme sponsors will already be considering to help them understand their resilience to market shocks. In practice, we find that many schemes calibrate their models to the level of a more severe one-in-20 year stress scenario. Even under this higher level of stress, many trustees might find that their schemes remain in surplus.

“Ultimately, the more resilient a pension scheme’s funding and investment strategy is, the more secure members’ benefits should be and the less reliance the pension scheme will have on the sponsor for further support. Whether the pension scheme is in surplus or not, we encourage trustees and sponsors to understand the impact of various levels of stress – not just on the pension scheme, but also on the sponsor’s ability to make good any shortfall in these scenarios.”

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