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Will 2024 Be A Record Breaking Year For Pension De Risking

Will 2024 Be A Record-breaking Year For Pension De-risking?

Wednesday, 3 April 2024

With barely a quarter of the year behind us, 2024 already looks like a record-breaking year for pension de-risking, according to the Pensions Regulator’s Pension Protection Fund (PPF). Its PPF 7800 Index tracks funding levels of every defined benefit (DB) pension scheme in its universe, using the latest scheme return information provided to The Pensions Regulator and the roll-forward methodology used for PPF levy purposes.

Positive funding situation overall – despite short-term decline

In its most recent monthly report, The Pension Protection Fundnoted that the aggregate surplus (total assets less s179 liabilities) of the defined benefit (DB) pension schemes in the PPF 7800 Index was estimated to have decreased to £425.4bn at the end of January 2024, from £428.2bn at the end of December 2023. The position was an improvement from one year ago, when a surplus of £374.4bn was recorded at the end of January 2023. However, despite the near-term decrease, the Pensions Regulator believes that the bigger picture suggests DB pension schemes are managing to hold on to their much-improved funding position compared to previous years.

The report also confirmed that the funding ratio (assets as a percentage of s179 liabilities) of DB schemes in the Index increased from the beginning of January 2024 from 142.8% to 143.9% at the end of the month. Again, this is a significant improvement on the funding ratio of 134.8% recorded in January 2023.

Delving deeper into the numbers, the report noted that total assets for pensions schemes in the Index were at £1,395bn, and total liabilities were £969.8bn. Of the 5050 total number of DB schemes in the Index, a total of 4,451 were in surplus, while just 599 DB schemes were in deficit. However, those schemes still face significant challenges, as the total amount of the deficit increased from £3.7bn at the end of December 2023 to £4.3bn at the end of January 2024.

Derisking will be a priority for many schemes

For those DB schemes with a healthy surplus, it’s expected that pension de-risking, where trustees and sponsors of schemes reduce the risks of the assets under management (particularly in terms of illiquid assets), will accelerate as schemes look to take full advantage of their improved funding positions. As a result, this could be the year when a number of larger-scale (£1bn to £2bn) schemes become a more common occurrence. Activity among smaller schemes is likely to heat up too.

However, for those schemes holding significant illiquid assets, adjusting or broadening their investment strategy will be a priority as they attempt to get ready for potential buy in or buy out activity. Another key consideration for schemes of all sizes will be administrative and preparatory work. Schemes will, therefore, have to ensure they have first-class operations, accurate up-to-date data and be fully prepared in advance of the de-risking process before embarking on any market activity. 

Innovative retirement solutions from EQ

In the current landscape, market expertise – and the ability to deliver innovative Retirement Solutions is more valuable than ever before. Our pension experts provide pension schemes, members, managers and trustees with data solutions on sensitive and highly complex projects, and specialise in managing the challenge at scale. With technology at its core, our pension platforms support our clients with all their pension administration needs. 

If you want to work with a trusted pensions partner on any aspect of de-risking, buy in and buy out or bulk annuity administration, get in touch.

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