Iain Clacher & Con Keating

A Response to the AgeWage blog
“Surpluses are Ephemeral”

The Pensions Regulator’s paper of January 27th “Estimated DB scheme universe funding splits and assets under management” offers the following asset, liability, and funding levels of the universe (4,818) of DB schemes.

Commencing with assets TPR offers, to which we have added the PPF asset estimate at September 2024.

Table 1: Overall Scheme Assets

at September 2024.

The lower value of PPF assets is consistent with earlier PPF estimates and in close approximation to the asset estimates produced by the quarterly ONS Financial Survey of Pension Schemes.

Our analysis of the previous periods of ONS and PPF data releases suggests that the PPF figures will over-estimate assets held by approximately 5% relative to the ONS survey results.

This would lead to an estimate of circa £1,106 billion, and the difference with TPR’s estimate would be staggering at £134 billion. This change alone would reduce the stated overall surplus from the £207 billion reported by TPR to just £73 billion.

As followers of our webinars and blogs here and for the Chartered Institute of Securities and Investment will know, we have also raised concerns over the large reductions in the Technical Provisions (TP) liability estimates produced by TPR in their most recent revisions of scheme data.

The March 2023 and 2024 data are shown in Table 2 below.

Table 2: March 2023 and 2024 liability estimates for TPR and PPF

TPR’s revisions to estimates of scheme liabilities at March 2023 was massive, a lowering of over £100 billion from their original estimate of TPs of £1203 billion to £1094 billion. There are also instabilities evident in these estimates over time. We show below the latest TPR liability estimates (September 2024) in Table 3 below.

Table 3: Liabilities at September 2024

The discount of the PPF liabilities estimate to TPR’s technical provisions estimate here is low, just 9%, when it would be expected to lie in the range 10%-15%.

We have also extracted the distribution of schemes from the distributional data supplied by TPR in their paper. The concerns we have with respect to both TPR’s estimate of assets and its estimates of liabilities allow us to recast TPR’s results reducing assets by £79 billion and increasing liabilities by £70 billion. This produces some very significant differences in funding levels and surpluses (as one would expect). We have used a uniform recasting across the distribution of schemes. While this may have effects on our results in distribution, it will not affect our results for overall effects.

Table 4: Recast overall surpluses September 2024

It is worth noting that there is an overall deficit on a low-dependency basis, implying that sponsors will face net demands for further deficit repair contributions nor will they have assets available for return to sponsors.

As Table 5 shows, the surpluses of schemes in surplus now decline heavily, and the declines increase in significance as the liability standard grows more onerous.

Table 5

Finally, in Table 6, we show the effects of this recasting on the numbers of schemes in surplus and deficit.

Table 6

While it seems a self-evident truth that recasting assets as lower and liabilities as higher will generate this result. This is to miss the point.

For TPR to still be overstating assets by many billions, despite having reduced their estimate of assets by many billions already, and at the same time unjustifiably reducing their liability estimates by such significant amounts, should be the subject of robust debate.

This would be true in normal times, but the return of surpluses, if they exist seems to be a significant part of emergent pensions policy and one of the areas where Treasury hopes to find a source of much needed investment.

This analysis challenges the widely held narrative that scheme surpluses are large enough, if made freely available, to make a material contribution to the investment problem. We do not believe they are.

By contrast, abandoning the pervasive culture of derisking and encouraging all schemes to invest fully in a diversified and productive manner would make the kind of difference that the Treasury is looking to achieve.