Rising stocks help to put defined benefit pensions in better state

The improvement in the stock market has benefited pension schemes.
The improvement in the stock market has benefited pension schemes.
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The funding position of defined benefit pension schemes continued to improve in February on the back of rising stock markets, figures showed this week.

The UK’s 6,560 defined benefit pensions, including final salary schemes, collectively had a surplus of £48.4bn at the end of last month, up from one of £46.1bn in January, according to pensions safety net the Pension Protection Fund.

The figure was more than twice the surplus of £23.7bn funds had in February last year, and it left them with assets worth 105.2 per cent of the liabilities they face.

The improvement was driven by a 1.3 per cent rise in the value of schemes’ assets during the month, as UK and global equity prices increased.

The gain more than offset a 1.1 per cent jump in the liabilities the pensions face, caused by a fall in gilt yields, which are used in liability calculations. The value of pension scheme assets has risen by 10.5 per cent in the past year to stand at £986bn, while liabilities have increased by only 7.9 per cent in the same period.

But despite the fact that pensions collectively had a surplus at the end of last month, 56 per cent of schemes are still in the red, facing a collective deficit of £53.4bn.

Defined-benefit pensions have become increasingly expensive to offer in recent years in the face of investment volatility and increased life expectancy.

The majority of companies have closed the schemes to new members, with many shutting them to existing ones as well.

They are being replaced with less generous defined contribution schemes, under which the individual shoulders all of the risk of investment volatility and increased life expectancy.