PPF 7800 deficit falls 20% over June
The aggregate deficit of 5794 schemes in the Pension Protection Fund's (PPF) 7800 Index is estimated to have decreased to £186.2bn by the end of June.
It fell from a £232.3bn deficit at the end of the month, while total assets reached £1.5trn, and total liabilities were valued at £1.7trn, according to the PPF's latest monthly report.
This led to an improvement in the total funding ratio from 86.8% at the end of May to 89.1% at the end of June.
There were 4,182 schemes in deficit and 1,612 schemes in surplus.
The update provided the latest estimated funding position, on a section 179 basis, for the defined benefit (DB) schemes potentially eligible for entry to the PPF.
This represents the premium paid to an insurance company to take on its levels of compensation which may be lower than full scheme benefits.
Assets decreased by 1.2% over June, which the PPF report said reflected the impact of lower UK equity prices, with the FTSE All-Share Index falling by 2.8%.
The value of liabilities fell by 3.7%, which was due to sharp rises in gilt yields over the month. Conventional 15-year gilt yields rose by 20 basis points (bps), while index-linked 5- to 15-year gilt yields rose by 19 bps over June.
However, gilt yields are still low compared to June 2016, with index-linked 5- to 15-year yields down by 33 basis points over that period, although 15-year gilt yields were up by 21 bps.
Commenting on the figures, Aviva Investors global investment solutions strategist Boris Mikhailov said:
"June was a busy month, first we saw the UK General Election dominating the headlines, followed by the Bank of England's surprisingly close vote to keep rates unchanged before ending the month with the European Central Bank's ‘misunderstood' statement that implied its asset purchase programme is coming to the end."
BlackRock head of UK strategic clients Andy Tunningley said schemes making hedging decisions should view the prospect of rising yields in the context of their starting point
He added: "If a scheme is starting from an ‘underhedged' position then an expectation that yields will rise should not preclude hedging more."
"It is all about sizing this "bet" appropriately. For many schemes, hedge ratios can be increased to a level that still means they can gain from rising yields, but ensures they are not taking excessive risk to any one particular driver of returns.
"For schemes that are more hedged, the starting point and challenges are different and arguably more nuanced, especially for schemes with deficits and with negative cash flow. Getting the right balance of risk between under-hedging, risk drivers of return-seeking assets and the cash generative power of different assets, is today's key challenge."
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