Defined Benefit  

Private pension scheme deficits fall by £9bn

Private pension scheme deficits fall by £9bn

UK private defined benefit (DB) schemes have seen their deficits fall by £9bn in the past month, according to data from JLT Employee Benefits.

At the end of May, the total shortfall of these schemes stood at £43bn but this has since fallen to £34bn, compared to £138bn at the end of April last year.

The total assets of these pension funds were now worth £1.57tn, while the liabilities stood at £1.6tn.

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Murray Wright, deputy chief actuary at JLT, said the half year results were strong for pension schemes when compared to the position twelve months ago, and also against 31 December 2017.

At the time, the shortfall of these pension funds stood at £150bn.

He said: "Rises in corporate bond yields, alongside solid equity market returns have contributed to lower reported deficits."

The data also shows that FTSE 100 companies are "very close to showing an aggregate surplus for the first time in a decade," he noted.

The total deficit of FTSE 100 companies defined benefit schemes has also fallen, by £3bn to £1bn.

Meanwhile the shortfall of FTSE 350 companies schemes also decreased, by £4bn, standing now at £5bn.

Mr Wright added: "This milestone highlights the striking point that these schemes are now in a position where they need to earn a return of less than 3 per cent per annum on their assets over the long run to allow them to pay benefits as they fall due to members.

"A return of less than 3 per cent per annum over the long run would generally be regarded as an achievable target for most schemes, even those running a low risk investment strategy."

Mr Wright said pension schemes that are ahead of schedule on their funding plans should actively seek to minimise their reliance on the sponsor through an integrated funding and investment strategy, linked to expected scheme cash flows and at the same time de-risk their liabilities.

He said: "A bull market that is almost 10 years old can’t be relied upon to keep delivering results."

According to Schroders, the current bull market will become the longest in history but will come to an end in 2020.

PwC also published it's monthly DB deficit figures today (2 July), which showed the shortfall of these schemes stood at £200bn at the end of June, the same value as the previous month.

The difference in figures between PwC’s Skyval Index and JLT is due to the method utilised to measure the deficit - the former uses the 'gilts plus' method, while the latter uses the standard accounting measure (IAS19).

Steven Dicker, PwC’s chief actuary, said: "UK pension schemes have benefited from recent positive equity performance. Many commentators link the current run of good performance to central bank policy in the major economies, suggesting equities could be vulnerable to future policy changes."

maria.espadinha@ft.com