Some defined benefit pension schemes have seen a reduction in deficits since the vote to leave the EU, bucking an overall trend that has seen deficits soar as a result of plunging gilt yields, pensions consultant Xafinity has revealed.
Following the 23 June EU referendum, which saw the UK vote for Brexit, gilt yields suffered dramatic reductions, hitting all-time lows of under 1 per cent.
On Thursday morning (13 July) yields on 10-year gilts stood at 0.78 per cent.
On Tuesday (12 July) the Pension Protection Fund revealed this reduction in yields had caused the UK’s aggregate DB scheme deficit to increase by almost £90bn.
But Ben Gold, head of Xafinity’s investment team, said not all DB schemes had lost out.
Those that employed leveraged liability driven investment - which aims to guard against financial shocks - were protected against falls in gilt yields, with some actually seeing an increase in overall assets.
He said: “Liability-driven investment strategy (LDI) will have provided pension schemes with some protection against the falls in gilt yields that we have seen since the Brexit vote.
“Indeed, because LDI assets have performed so well, many pension schemes with LDI will imminently be receiving cash payments from their LDI managers.
“Receiving these cash payments provides pension schemes with opportunities to further refine their investment strategies, particularly if their outlook or risk appetite has changed.”
Paul Darlow, head of propositions at Xafinity, told FTAdviser while the PPF’s aggregate figures were correct, a “decent number” - though “by no means the majority” - had bucked that trend.
He said those that had implemented liability-driven investment strategies were “very unlikely to see a big gain”, adding that the more likely result was for gains to match liabilities, and for schemes to break even overall.
He said many schemes had not used leverage liability-driven investment strategies, because, while it would protect against downside, it would also hedge against rising yields - thus locking in the recent low gilt yields.
He said this was based on the view that pre-Brexit yields “couldn’t get much worse”.
“But unfortunately, we’ve seen that gilt yields can go lower,” he said.
james.fernyhough@ft.com
