Pension funding in the silly season


I’m sure I’m not the only person who read this headline in Professional Pensions yesterday – astonished!

XPS’ monthly funding report of course tells us no such thing.

July was a month when gilt yields initially rose as  the Bank of England showed it continued to be powerless to combat inflation. But fell back by the end of the month as better than expected inflation figures arrived, suggesting that high interest rates were having an impact and might not last for ever.

The £14bn “increase” in the value of UK DB pensions was based on a more optimistic view on asset values, it had little  to do with the (non) change in long-term gilt yields.

I’m not quite sure how PP managed to get it’s headline muddled up when it had the XPS press release in front of it- which it seems to have printed in its article

Latest data from the consultancy’s DB:UK Funding Watch revealed the aggregate surplus of UK DB schemes stood at £145bn by then end of July, compared to £131bn at the end of June.

According to XPS, the improvement was a result of the “unexpectedly low” inflation figures, which meant long-term gilt yields finished the month at similar levels recorded at the start of the month and cancelled out earlier increases. The firm also noted due to aggregate scheme liabilities remaining at similar levels recorded in June, along with in an increase in aggregate scheme assets, there was a slight increase in the surpluses many schemes have recently built up.

Presumably staffing levels at PP are depleted , but surely someone at XPS checks the reporting on their own numbers and doesn’t let such a silly error persist. Daily monitoring of the long term funding positions of UK corporate DB pensions is clearly a recipe for confusion!

Why errors like this happen.

It is not intuitive to understand how good news for the British economy is bad news for pensions (ov vice versa). Pension liabilities – valued using gilts as a measure, fall when gilts fall, gilts fall when inflation rises. The higher  inflation, the better DB pensions look. That’s not an easy message.

Most people, Professional Pension staff included, depend on assets going up to get a better pension pot. A  pension pot does not go up when inflation goes up, typically a pot goes down because equities don’t like to see the economy out of control. Most of our pots are invested in equities – not gilts.

I suspect that what’s happened here is that some over-worked journalist has got confused and published a headline without recourse to the source of the press release – XPS.

These things happen. No harm done…in the short term.

But what about this headline from the beginning of the year?


The use of the word “funding” is ambiguous at best. The Oxford English Dictionary defines funding as

money provided, especially by an organization or government, for a particular purpose:“funding for the project was provided by the Housing Corporation”

funding refers to money and the general estimate is that the money in pension funds last year fell by between £450bn (PPF) and £600 bn (Keating/Clacher).

So how do we account for this £1 trillion variance between a £400bn funding improvement and a £6oobn loss of funds?

The answer is of course that assets are valued by the market and asset values represent what you’d actually get in cash from selling shares, bonds, properties and other things owned by the trustees.

Liabilities speculatively valued by the present cost of meeting future pension promises using the expected return (yield) on government debt (gilts). So liabilities go up and down quite independently of the way assets go up and down.

So when the man on the Clapham Omnibus discovers – when opening his Professional Pensions – that pension schemes are 20% better funded, he expects them to have 20% more money in them and he is disappointed to hear that they have less money in them.

The man on the Clapham Common omnibus gets confused, like the Professional Pensions journalists and editors,

There is another way

There is another way of expressing how much money there is in pension schemes and whether it’s enough to pay the promised pensions. It is know as “best estimates” and it relies not on gilts to value pensions but the expected return on the actual assets in the pension schemes. There is an index that works on this basis and it is known as the First Actuarial Best Estimates Index (FABI)

What it shows over the years is that pension schemes do not swing wildly from deficit into surplus and back again – it does not conjure up headlines like the ones we see above. It produces extremely boring news.

Pension scheme funding – (the light blue line) has hovered between 14o and 120% of what is needed to pay pensions over the past eight years. Assets have fallen back to 2015 levels, because of falling prices of gilts in the past 18 months.  Liabilities have risen and fallen back, because it is now cheaper to pay pensions (using gilts), but because this way of presenting the numbers is based on real world money and not financial economics, it shows that nothing much happens to funding and that despite the doom-mongering , DB pension schemes are in surplus with monotonous regularity.

That this very boring story tells us what we should have known all along, that the extravagant borrowing of pension funds to immunise themselves against supposed deficits , using the money to double, triple and quadruple up on gilts, was a waste of time and money.  As a side-order, it brought down a Government and nearly ruined the Government’s capacity to borrow money.

The serious bit

Errors happen, people get the wrong idea. We smile and move on. Except we don’t move on.

We keep making the same mistakes about pension scheme funding because we keep applying financial economics not common sense to the way we value pension scheme funding.

Which leads to confusion and disillusion. It has led to the catastrophic decline in DB accrual and the funding of deficit contributions to meet reduced pension promises that have ruined Britain’s economic growth.

It may be August and pension’s silly season, but the consequences of mark to market valuations of liabilities have been very serious  indeed.


Confirmation of XPS’ news on scheme funding in June came from the PPF, happily with a comprehensible headline from PP

PPF finds surpluses surpassed previous highs by £9bn in July

Latest data from the lifeboat fund’s 7800 Index revealed the aggregate surplus of the 5,131 schemes in the index increased to £446.1bn, a £9.1bn rise from the record high of £437bn recorded at the end of June.

The index reported the total assets of the schemes stood at £1,407.5bn while total liabilities were £961.4bn. It also noted there were 4,673 schemes in surplus and 458 schemes in deficit on a section 179 basis, and the deficit of the schemes in deficit fell to £2.2bn, compared to £2.3bn at the end of June.

The PPF also found the funding ratio increased to 146.4% by the end of July, compared to 145.8% in June.

PPF chief actuary Shalin Bhagwan said: “Despite a softening of inflation during July, market interest rates were broadly unchanged, which has resulted in little movement in estimated scheme liabilities this month. Meanwhile, optimism that developed economies would avoid recession grew and growth-sensitive assets like equities saw strong returns, leading to an improvement in estimated scheme assets.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Pension funding in the silly season

  1. Peter CB says:

    I think we have been in the silly season on pension scheme funding for a long time now!. As you rightly point out all this talk of improvement in scheme funding levels is nonsense.

    The only thing that has changed over the past year is an assumption about the uncertain future used in the valuation models. In reality nothing has changed: the cash liabilities of the scheme have not gone down; the income from the scheme’s existing investments has not gone up.

    The only thing that has changed is that the assumed cost of a buy-in or buy-out of the Members benefits has gone down. However any increase in the expected return on the assets used by the insurance company will have been offset by the reduction in the initial cash transfer sum. The insurance company has always be able to benefit from pooling mortality risks, lost to the pension scheme on the transfer, so there is no change there . Such transfers are therefore purely a transfer of risk from the pension scheme to the insurer.

    From the Member’s point of view, the headlines suggesting scheme funding levels have improved would suggest the risks to his pension benefits have gone down. However if that improved(?) funding level has been used to transfer his pension to an insurance company it is far from clear that the risk to his pension has actually gone down.

  2. Bryn Davies says:

    Thank you for pointing this out. But it’s important to be clear that there’s no universe in which “… good news for the British economy is bad news for pensions (or vice versa).” The ability to pay future pensions, of whatever stripe, depends on the health of the UK economy. The intuitive view that the healthier the economy, the better able it is to pay pensions, is correct.

    • Peter CB says:

      Agreed – and also probably the reason Trustees have been reducing their exposure to UK assets!

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