UK and US DB schemes record first surpluses since pre-GFC as higher rates cut liabilities
A decade and a half after the global financial crisis (GFC), defined benefit (DB) schemes across the G7 are recording funding surpluses, marking a reversal from persistent deficits that weighed on plan sponsors and regulators.
The change is driven by the sharp rise in interest rates and bond yields since 2022, which increased discount rates and lowered the present value of liabilities.
Even as credit spreads sit near 10-year lows, absolute yields remain well above pre-pandemic levels, helping DB plans achieve stronger funding positions.
In the United Kingdom, the Pension Protection Fund’s 7800 index shows DB schemes reaching a surplus of 120 percent by May 2025, surpassing the 2007 peak.
UK funds, once heavily exposed to equities, now hold just 15.5 percent in stocks compared with more than 60 percent in 2006.
Bonds account for nearly 70 percent of assets, with allocations to corporate credit and index-linked gilts rising steadily over the past decade.
In the United States, Milliman’s Pension Funding Index reported a 101 percent funding ratio for the largest 100 corporate DB schemes in 2024 — the first surplus since 2007.
US funds display a broader asset mix than their UK peers, with corporate and foreign bond holdings outweighing Treasuries.
The shape of the yield curve has also played a role.
The steepening and disinversion of G7 curves since 2024 has increased discount rates on long-dated liabilities, reducing obligations further while prompting schemes to reassess portfolio risk.
These shifts have reignited the debate over discount rates and curves.
Four approaches dominate: the market-based method using bond yields, the expected return method linked to plan assets, the Day approach which accounts for uncertain liabilities with lower rates, and the stochastic “probability of ruin” framework that balances risks of assets and liabilities.
Regulators in some jurisdictions, including the UK, are moving toward flexible models rather than strict reliance on government yields.
With stronger funding positions, schemes are reallocating assets and ramping up liability-driven investment (LDI) flows to guard against a return of deficits similar to those seen after the GFC and COVID-19 shocks.
