The UK’s defined benefit (DB) pension schemes clawed back £81bn of their combined deficit throughout November, but too late for one manager who has described 2016 as a “lost year” for many pension funds.
The Pension Protection Fund’s (PPF) 7800 index, which records the aggregate deficit of the 5,794 schemes eligible for protection from the lifeboat fund if their sponsoring employer goes bust, is estimated to have decreased from £275.9bn at the end of October to £194.7bn at the end of November.
This represents a funding ratio improvement from 84.1% at end October to 88.1% at the end of November. Total assets were £1,443.1bn and total liabilities were £1,637.8bn.
It is the index’s third consecutive monthly improvement, as rising gilt yields caused liabilities to fall more than scheme assets.
Commenting on the funding improvement, Blackrock head of UK strategic clients, Andy Tunningley, said Father Christmas had delivered trustees an “early present”, but 2016 had been “another lost year for many pension funds”.
He added: “Government bond yields across the globe jumped higher during November following the surprise election of Donald Trump as the President of the United States. The result added fuel to the fire for some nascent trends in markets, in particular trends towards steeper government yield curves and reflation. UK yields were further helped higher by Chancellor Hammond’s first Autumn Statement, with the modestly relaxed fiscal purse strings leading to greater gilt issuance in the near term.
“Trustees would do well to look beyond the headlines, however – real yields, which are far more relevant to pension funds than nominal yields given the inflation-linked nature of many pension promises, are still below their pre-Brexit levels. We believe that the extra borrowing announced by the Chancellor will have little impact on the huge supply-demand imbalance in the long dated gilt market that acts to anchor yields to low levels. Pension funds cannot rely on rising yields to escape their funding holes – most pension funds should hedge more interest rate and inflation risk than they currently do.”
This month, the figures reflect a new method of calculating the PPF 7800 index which takes into account two changes.
Firstly, funding levels are now calculated on the Purple 2016 dataset and the PPF has restated the funding position from March to October 2016 to reflect this. The dataset is estimated to include more than 98% of liabilities of PPF eligible schemes and is based on a more up-to-date universe of schemes and their funding information excluding, for example, those that have entered PPF assessment. According to the PPF, moving to the Purple 2016 dataset resulted in a 2.7 percentage point improvement in the funding position as at 31 October.
Secondly, the index now takes account the new version for actuarial assumptions for section 179 valuations introduced from 1 December. The changes to s179 valuation include: the use of separate discount rates for pensioners and non-pensioners post retirement; the use of yield indices that have durations that better match average liability durations, including the introduction of a new index-linked gilt yield; and the mortality assumptions. This resulted in a 1.5 percentage point improvement in the funding ratio, the PPF said.
