The aggregate deficit of defined benefit (DB) pension schemes eligible to enter the pension lifeboat fund has reduced by 55 per cent on November last year, as the fund changed how it calculates the underlying data.
The Pension Protection Fund’s (PPF) 7800 Index out on 12 December, which captured the funding levels of 5,588 schemes, estimated the total deficit to be about £87.6bn, down from £194.7bn recorded last year.
Meanwhile, the schemes’ overall funding level has increased from 88.1 per cent recorded in November 2016 to 94.7 per cent now.
But the decrease in the deficit is largely due to the PPF’s switch to new underlying data as well as some market movements, the fund said.
The PPF changed the basis for estimating the funding position of DB schemes eligible to enter it should they default, by moving to the Purple Book 2017 dataset.
According to the PPF it is based on a more up-to-date list of schemes, excluding for example those that have entered PPF assessment, and it also uses more recent funding information.
It said this resulted in a 3.5 per cent improvement on the funding level as at 31 October 2017 and an overall reduction in deficit of £60bn.
“The new data is more up-to-date and therefore we expect it to give a different value of assets and liabilities than the old data,” it said.
“We would note that we update the PPF 7800 every year following publication of the Purple Book – this is not new for 2017.”
Taking into consideration the new data only, November's deficit was down £0.1bn on the £87.7bn recorded at the end of October this year.
There were 3,663 schemes in deficit in November this year, representing 65.6 per cent of all schemes, compared with 4,272 schemes last year (73.7 per cent of all schemes) and 3,652 schemes at the end of October 2017 (65.4 per cent).
These schemes alone have a deficit of about £197bn, which had fallen 25 per cent on November last year but was up slightly on the £196.7bn recorded at the end of October this year.
In contrast, the surplus of well-funded schemes was up 59 per cent year on year, from £68.9bn to £109.4bn. In October this year it stood at £109bn.
The figures were estimated on a section 179 basis, which represents the premium that would have to be paid to an insurance company to take on the payment of PPF levels of compensation.
The PFF stated: “The value of scheme assets is affected by the change in prices of all asset classes, but owing to the volume invested and the volatility, equities and bonds are the biggest drivers behind changes; bonds have a higher weight in asset allocation, but equities tend to be more volatile.”
It said in the month of November, conventional 15-year gilt yields fell by 3 basis points, while index-linked 5-to-15 year gilt yields rose by 7 basis points.
Over the year to November 2017, 15-year gilt yields were down by 12 basis points, index-linked 5-15 year gilt yields were up by 5 basis points and the FTSE All-Share Index was up by 9.2 per cent.
Andy Tunningley, head of UK strategic clients at BlackRock, said schemes should be taking a “holistic” approach to portfolio construction, considering cash outflows, income, risk and return in combination, rather than prioritizing one of those objectives.
He said: “Underfunded schemes with excessive or insufficient allocations to any of these asset groups can suffer in adverse scenarios.
“In particular, schemes should beware of investment strategies that prioritise cashflow generation but compromise risk or return objectives,” he said.
“A balanced approach is better for thawing the sizeable deficits that schemes are facing this winter and beyond.”
The PPF is funded by a levy on pension schemes.
For the majority of savers below their scheme’s normal pension age it will pay about 90 per cent of their pension subject to a cap of £34.655 per year at age 65.
The PPF estimated in September the levy for 2018 to 2019 will be £550m, 10 per cent less than the previous fiscal year.
carmen.reichman@ft.com
