Rallying growth assets may have enabled defined benefit (DB) schemes to reach fully-funded on a section 179 basis in the first half of May, according to BlackRock.
Thanks to a combination of rising UK gilt yields, positive momentum for developed market equities, strong US data and a weaker sterling, the Pension Protection Fund's (PPF) 7800 Index may have hit 100% funded for the first time in over seven years.
However, this spell may have been brief, as the final 10 days of the month saw a sell-off in markets. Emerging market equities dropped on the back of trade war fears, caused by the introduction of US tariffs on imported steel, and a strengthening US dollar.
At the end of the month, the aggregate DB deficit was £94bn on a s179 basis, the lifeboat fund said, rising from April's figure of £81.7bn.
The combined assets of the 5,588 schemes amounted to £1.6trn, while liabilities totalled £1.7trn. The growth in liabilities outpaced that of assets, with £46.1bn and £33.8bn increases respectively, leading to a funding level drop from 95.1% to 94.5%.
The number of schemes in surplus fell by 22 to 1,929; these schemes had a combined surplus of £112.3bn, while the remaining 3,659 schemes in deficit had a shortfall of £206.4bn.
Over the month, conventional 15-year gilt yields fell by 14 basis points (bps) while index-lined 5-to-15-year gilt yields fell by 11bps. Meanwhile, over the last year, the FTSE All-Share Index grew by 2.6% and the FTSE All-World Index climbed 6.4%.
While the funding level dropped over the month, it is the 13th month in a row that has seen a level over 90%.
BlackRock head of UK strategic clients Andrew Tunningley said May had been a "game of two halves" with growth assets climbing in the first two weeks of the month before geopolitical risk from Italy, the US and China set in and negated the gains.
"Many of our clients took advantage of the rise in funding levels - indeed the PPF 7800 Index funding level might have touched 100% for the first time in over seven years mid-month - by de-risking from growth assets into matching or hedging strategies."
However, he warned markets may remain volatile over the rest of the year.
"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," he said.
"Protecting against surprise falls in yields is key and appropriate defence in the form of liability-driven investment strategies remains important. Even in this rising rate environment, the 2071 conventional gilt syndication mid-month attracted record demand, being 6.5 times oversubscribed, providing further evidence that gilt yields remain anchored at the ultra-long end."
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