Companies are overpaying into their pension schemes by £9bn a year because they are not taking advantage of improving market conditions, PricewaterhouseCoopers (PwC) has said.

According to data based on PwC's Skyval pensions index, which tracks the health of defined benefit (DB) schemes across the FTSE 100 on a real-time basis, pension scheme balance sheets across corporate UK may look £70bn worse off than they really are.

The aggregate funding ratios of pension schemes with valuation dates 31 December 2012 improved by 9%, from 79% to 88%, over the following years and deficits were down by a third by the time the valuations were required to be finalised in March 2014.

PwC said the improvement was due to changing market conditions, particularly rising nominal interest rates and gains in return-seeking assets.

However despite pension scheme financing rules allowing credit to be taken for improvements in market conditions, not enough schemes are taking advantage of this, PwC said.

The firm said that a more accurate picture of a scheme's deficit will allow companies to pay the cash necessary to support the scheme prudently, rather than target excessive reserves, and allow trustees the right information to remove unnecessary risk form the pension scheme at the most opportune times.

Raj Mody, PwC head of pensions, said: "Pension scheme funding is a one-way valve - once money is in the pension fund it is unlikely to ever be returned, even if it surpasses requirements.

"It is surprising that more companies with DB pension schemes are not taking advantage of the improved market conditions to better manage their cash commitments. Cash is being unnecessarily tied up in pension schemes when it could be reinvested in the business to support growth."

He said that monitoring funding in real-time will take account of market movement and will allow companies to only pay the cash needed to support the scheme.

Mody added: "A more accurate picture of the pension scheme's deficits will leave trustees safe in the knowledge that they can afford to remove risk from the pension scheme, which will ultimately benefit the scheme and employer.

"A lack of real time accurate information could result in flawed management actions on both sides of the pension scheme table – for employers and for trustees."

First published 09.07.2014

monique_simpson@wilmington.co.uk