As long-term rate expectations rose and equity markets pared back some of their April losses, defined benefit funding levels improved in May, according to the Broadstone Sirius Index.  

The index’s fully hedged scheme improved 0.2% in low dependency funding, with a reduction in deficit of £200,000.  

Broadstone said an environment of rising long-term interest rates will benefit schemes that are not fully hedged. The hypothetical 50% hedged scheme saw its funding level improved by over 2 percentage points from 103.6% to 105.8%, or £500,000 more in surplus. 
   

 

"While markets continue to be volatile, DB pension scheme funding continues to hold steady. May was particularly encouraging, with a funding improvement realised whether the scheme was fully hedged or not,” said the consultancy’s head of trustee services, Chris Rice.  

The improvement in funding for many DB schemes could give further impetus to companies wanting to see surplus released, after the government has just published a pension schemes bill that would ease requirements around accessing DB surplus. It also coincides with guidance by the Pensions Regulator earlier this week to help sponsors and trustees decide about their endgame. Both broaden the conversation around DB, said Rice. 
   

   

“Along with continued improvements in funding, this will provide plenty of food for thought for trustees and employers as they consider their long-term strategy and endgame objectives,” he said.  

Broadstone’s head of policy David Brooks suggested that the amounts of DB surplus released will be significantly lower than the £160bn referenced by government.   

“The government has been explicit in placing firm guardrails around these new freedoms by ensuring that surpluses can only be released at the discretion of trustees, whose strict fiduciary duty should provide sufficient protections to members,” he said.  

Surplus release has been widely welcomed, though many point to the need for appropriate member protections. 
 

Barnett Waddingham’s head of DB endgame strategy, Ian Mills, said: “Now that the pensions industry has a much clearer understanding of how the surplus regime will operate, it is imperative that DB trustees and sponsors consider whether using these new flexibilities is in their mutual interests. There will be many cases where money can be returned safely and members' pensions can be enhanced. These objectives are not mutually exclusive."  

The government’s roadmap shows regulations and guidance on surplus release may only come into force in 2027.