Defined BenefitJun 13 2018

Pensions lifeboat deficit increases by £12.3bn

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Pensions lifeboat deficit increases by £12.3bn

The aggregate deficit of the around 5,500 defined benefit (DB) schemes in the Pension Protection Fund (PPF) 7800 Index has increased to £94bn at the end of May, when compared to April values.

This represents an increase of £12.3bn when compared to the previous month’s figures of £81.7bn.

The funding ratio decreased from 95.1 per cent at the end of April 2018 to 94.5 per cent.

Defined benefit schemes’ total assets were £1.61trn, while total liabilities were £1.71trn.

There were 3,659 schemes in deficit and 1,929 schemes in surplus, the PPF stated.

According to Andrew Tunningley, BlackRock's head of UK strategic clients, markets in May registered a 'game of two halves', as growth assets continued to rally and bond yields rose for the first couple of weeks, before giving all these gains back in the last 10 days.

He said: “Political turmoil in Italy, US tariff announcements on metal imports, and ongoing trade tensions between the US and China resulted in a sell-off in markets towards the end of the month.”

Nevertheless, the rise in UK gilt yields in the first half of the month will have been welcomed by pension scheme trustees as their liability values should have fallen, he noted.

He said: “Many of our clients took advantage of the rise in funding levels – indeed the PPF 7800 Index funding level might have touched 100 per cent for the first time in over seven years’ mid-month – by de-risking from growth assets into matching or hedging strategies.

“Those schemes who had a de-risking framework in place will be enjoying their half-time oranges.”

Mr Tunningley expects the markets to remain volatile, and “pension schemes should ensure they have a balanced squad of assets to tackle the challenges ahead”.

He said: “While we expect bond yields to bounce back and rise further over the rest of 2018 and beyond, schemes can’t rely on this to win (funding level percentage) points.

“Protecting against surprise falls in yields is key and appropriate defence in the form of [liability-driven investment] LDI strategies remains important.”

Earlier this month, JLT Employee Benefits published its monthly data on FTSE 100 companies pension schemes, which are close to surplus for the first time in a decade.