PPF 7800 deficit slashed in half as gilt yields rise
The combined defined benefit (DB) deficit decreased by £52.8bn over January to £51.0bn on a section 179 basis, according to the Pension Protection Fund's (PPF's) latest update.
Over the month liabilities for schemes in the lifeboat fund's 7800 Index fell by £66.2bn, a decrease of 3.9% over the month and a decrease of 2.2% over the year, while assets decreased by £14bn in January.
Overall, the 5,588 schemes had an aggregate funding level of 96.9%, up three percentage points from December and one of its highest level since 2014. There were 3,493 schemes in deficit and 2,095 schemes in surplus at the end of January, moving from 3,710 and 1,878 respectively at the end of December.
Conventional 15-year gilt yields rose by 21 basis points (bps), and index-linked 5-15 gilt yields were up by 33 bps over the month.
BlackRock head of UK strategic clients Andy Tunningley, said: "So far in 2018 government bond yields have marched higher, driven by a stronger outlook for global growth and inflation, and in turn an expectation of tighter monetary policy. Although the US has been the main driving force, the UK is also joining in the party."
Tunningley explained that whilst this poses a golden opportunity for short-term investors, it is important to keep in mind the longer-term context, as the Bank of England only expects to raise policy rates around 75bps over the next three years, reaching a level far below previous norms.
"This is in keeping with our expectations for bond yields over coming years - we expect nominal yields to rise due to global inflation slowly heating up and economic slack diminishing, but the upside to yields is very much limited by structural forces; demographics, slow productivity growth, pension fund demand, and more broadly, a build-up of global savings that are seeking safe, liquid assets," he said.
The total deficit of all schemes in deficit is estimated to have decreased to £174.2bn at the end of January, from £210.0bn at the end of December 2017.
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