In September 2019, the Bank of England interest rate was 0.75%, inflation was below 2%, the UK was still in the EU and no-one had heard of a lockdown. Yet, three years later (in September 2022) interest rates had jumped to 2.25% and inflation was around 10%.
These recent events help to demonstrate why we are obliged to carry out an actuarial valuation of the UKRF every three years. It enables us to take a good, detailed look at the Fund’s finances in the context of what’s happening around us. Our aim is to understand our funding position now and, if needed, modify our plan to make sure the UKRF continues to have the money to pay benefits to you, and all our members, as and when they’re due.
In the years between valuations, we do interim financial checks.
2022 was an actuarial valuation year, and here’s what we found…
We’re ahead of plan
Following our 2019 valuation, our goal was to remove the then £2.3 billion gap or deficit between how much we have (our assets) and how much we estimate we need to pay everyone’s pension now and in future (our liabilities) by 2023. In 2021, our interim financial check showed a small funding surplus.
Our recent full review showed…
At 30 September 2022, the UKRF continued to be in surplus, and that surplus had grown to around £2 billion. This is great news for many reasons, one being that we’ve achieved our goal a year earlier than planned.
We’ve also met our wider aim for being less dependent on Barclays to support the Fund (our low dependency goal), three years early. Part of achieving this has been to build a low-risk, diverse portfolio of assets whose cashflows aim to closely ‘match’ our liabilities (see opposite). This gives us more certainty that we can pay pensions when we need to and means that we’re expected to be less reliant on Barclays’ contributions to make up any shortfall.
We’re focused on ‘matching cashflows’
This means looking at when we’re due to pay money out to members and aligning this with when and how much money is expected to come in from our assets. Better alignment means the UKRF’s funding level is less sensitive to swings in market values, because asset and liability values should generally move together.
The story continues…
We are pleased with the outcome of our latest valuation but we also recognise that this is a financial snapshot based on circumstances at a specific time. In practice, we need to manage the UKRF’s investments over many, many years, and in this time our funding level is constantly adjusting to reflect things like economic and market conditions.
As a result, our aim to sustain a positive funding level that provides security for members’ benefits is still ongoing.
We will continue to refine our investment strategy and regularly assess the controls we’ve put in place to address risks like market volatility, climate change and inflation. This includes holding enough financial reserves to help us weather future investment uncertainty. All our risk management goals are outlined in our Statement of Investment Principles DB Section.
We’ve improved year-on-year
| As at 30 September | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|
| As at 30 SeptemberSurplus (+) or deficit (-) | 2022+ £2.0 billion | 2021+ £0.6 billion | 2020- £0.9 billion | 2019- £2.3 billion |
| As at 30 SeptemberUKRF funding level | 2022108.0% | 2021101.7% | 202097.5% | 201994.0% |
A funding level of 100% or more means that the Fund’s assets should be sufficient to cover the Fund’s liabilities.
What’s led to this improvement?
Compared to our last actuarial valuation three years ago, our improved funding position is mainly due to:
- Barclays making additional contributions of £2 billion to help reduce the gap, as agreed in the 2019 Recovery Plan;
- Returns on the UKRF’s investments (relative to liabilities) being better than expected;
- Higher than expected inflation which has increased the value of our assets more than it has increased the value of our liabilities; and
- Increases in life expectancy being lower than anticipated, meaning the future cost of paying benefits is now expected to be lower.
These same reasons are also why our current funding level has improved compared to our 2021 interim results reported in the 2021 Summary Funding Statement (albeit to a smaller degree given the shorter timeframe).
What’s a Recovery Plan?
If a scheme has a funding gap, the trustees and supporting company may agree on extra employer contributions to help reduce it.
In 2019 we agreed a Recovery Plan with Barclays. This year, because the Fund is in surplus (i.e. there is no gap) we did not need to agree another one.
Moving with the times
An actuarial valuation is a calculated estimate based on assessing lots of factors that could affect the value of the Fund’s current (and future) assets, liabilities and expected cashflows. For example, we look at things like life expectancy trends, and economic and market conditions. We then make certain assumptions which we use to help work out the UKRF’s funding level.
During every full valuation we review and, if needed, adjust our assumptions to align with what we currently know about the world and these economic and social factors. Changing assumptions can affect the expected values of our assets, liabilities and cashflows. Compared to 2019 the main assumptions changed for 2022 were:
| In 2022 (compared to 2019) | Which means… |
|---|---|
| In 2022 (compared to 2019)Higher interest rates and lower Government bond prices | Which means…The money needed now to pay members’ benefits in future is expected to be less, reducing the expected value of the UKRF’s liabilities. |
| In 2022 (compared to 2019)Inflation is higher than anticipated | Which means…There will be an increase in the expected value of some of the UKRF’s assets (in particular those linked to inflation). There will also be an increase in the cost of paying members' benefits – which increases the value of the UKRF’s liabilities. |
| In 2022 (compared to 2019)Life expectancy to rise more slowly | Which means…The money needed to pay members’ benefits is expected to be lower, which reduces the expected value of the UKRF’s liabilities. |
What about our investments?
We invest the Fund’s defined benefit assets on behalf of members. Here is how they did over three different time-periods to 30 September 2022.
| Total returns to 30 September 2022 | 1 year | 3 years, annualised | 5 years, annualised |
|---|---|---|---|
| These figures only show the return from invested assets. They exclude the effect of money paid out (e.g. pension payments) or money paid in (e.g. contributions from Barclays). | |||
| Total returns to 30 September 2021Total investment returns | 1 year-24.8% | 3 years, annualised-7.7% | 5 years, annualised-0.2% |
| Total returns to 30 September 2021Liability returns | 1 year-26.6% | 3 years, annualised-9.2% | 5 years, annualised-2.0% |
The ‘liability returns’ are the returns that UKRF assets need to achieve to maintain the funding position. Even though the value of the Fund’s investments have reduced, the value of the Fund’s liabilities have reduced by more, meaning the funding position has improved.
Read more about our investments.
We continue to work closely with Barclays
1. We have back-up. Barclays continues to uphold its overall responsibility as the sponsor for the UKRF.
2. We have access to extra security (if needed). If the UKRF is estimated to have a funding deficit again Barclays will provide a pool of assets as security, which we can use if needed, or if Barclays became insolvent.
3. We’ve agreed a pause on Barclays’ contributions. We (the Trustee) have agreed with Barclays that no contributions are due in 2023. This means that the contributions the bank would normally make towards members’ benefits (like the employer’s Afterwork contributions for example) will be met out of the UKRF.
Before agreeing this with Barclays, we thoroughly investigated the UKRF’s financial position, reviewed the Fund’s rules and took advice. We regularly review the bank’s ability to support the UKRF (its employer covenant) and are confident this remains strong.
We have also agreed that this pause on contributions will be tested every 12 months and will only remain in place if the UKRF’s funding surplus is enough to ensure it retains an enhanced low dependency on Barclays (see below).
Maintaining “enhanced” low dependency
We’re focused on maintaining the UKRF’s current strong funding position and our low dependence on Barclays.
We’re doing this in a few ways, like reviewing our current investments and future strategy and de-risking further where appropriate.
Part of assessing whether the pause on Barclays' contribution can continue each year will be to check that our asset values are sufficiently higher than the value of our liabilities, to ensure that there’s a material “buffer” and that we maintain an enhanced low dependency on Barclays.
And finally, by law we need to tell you:
- Barclays has not received any money back from the Fund since the 2021 Summary Funding Statement;
- The Fund has not received any directions from the Pensions Regulator to change contributions or benefits, nor has the Pensions Regulator made any modifications to the Fund; and
- If the UKRF were to discontinue or ‘wind up’, members’ benefits would need to be secured with an insurance company (instead of by the Fund). The cost of providing pensions in this way is much higher than providing pensions by the Fund. At 30 September 2022, the value of the Fund’s assets was more than the estimated amount needed to secure all members’ accrued benefits. This surplus was £0.5 billion (compared to a £7.69 billion deficit in 2019), meaning there was a funding level of 102% (compared to 82% in 2019). There is no intention to wind up the Fund.