Defined benefit (DB) schemes saw a £21.1bn growth in their funding shortfall last month as both gilt yields and equities suffered falls, according to the Pension Protection Fund (PPF).
On the section 179 measure, the aggregate deficit of the UK's 5,588 DB schemes was £72.1bn as of 28 February, compared to £51bn at the end of January. The value of assets fell by £8bn while liabilities increased by £13.1bn.
This resulted in a funding level fall of 1.3 points to 95.6%, but it is still significantly higher than the 86.2% level recorded in February 2017.
Last month saw 115 more schemes in deficit, with 3,608 schemes - or 65% of the universe - recorded as having a combined shortfall of £187.6bn. Another 1,980 were in surplus, with a combined £115.5bn funding spare.
The growth in liabilities was driven by a fall in gilt yields, with index-linked 5-to-15-year gilt yields falling 10 basis points (bps), while a fall in equity prices helped to pull down asset values. Conventional 15-year gilt yields rose by 1bp over the month.
Although the FTSE All-Share Index was down over the month, it went up by 0.7% over the year.
Aviva Investors global investment solutions investment strategist Boris Mikhailov explained:
"The main story in February was a sharp sell-off in equities with the FTSE All-Share falling 3.3% and putting a dent into pension scheme portfolios. This, coupled with a slight fall in long-dated gilt yields, has resulted in a deterioration of funding positions. With pension schemes typically investing up to a third of their assets into equities and running 60%-70% under-hedged positions in interest rates changes, the PPF updates will continue to show volatile positions until we see widespread changes to asset allocation.
"With the volatility in the markets likely to increase, it will continue to result in more volatile funding positions. For most schemes it is possible to reposition the portfolio to achieve more consistent returns, and to protect against severe drawdowns."
BlackRock head of UK strategic clients Andy Tunningley added the 4.6% funding level shortfall showed there was still a lot of work to do.
"Although the PPF funding level aggregate has improved greatly over the last 12 to 18 months, from around 80% to 95%, there is still further to go."
He said, thinking ahead to the "end of the tunnel", trustees should consider whether de-risking with an insurer, via a buy-in, or with cashflow-driven investing (CDI) is the best approach for their scheme.
"While incremental de-risking is a prudent approach, achieving returns in excess of liabilities through the remaining growth portfolio is essential to close to gap," he continued, arguing private assets "may seem a common sense home for your money."
"Whether approaching the end of the tunnel, or still in the dark, staying cognisant of the potential opportunities and setbacks posed by markets is key," he added. "Good decision-making avoids tunnel vision, and welcomes the examination of all opportunities."
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