The aggregate defined benefit (DB) funding level worsened in March, hitting its worst level since last August, the Pension Protection Fund (PPF) has said.
At the end of March, the universe of 5,588 schemes was funded to a 93.1% level, compared to 95.6% at the end of February. This is down from the 96.9% four-year high recorded at the end of January, and its lowest level since last August, when the figure was 91%.
The lifeboat fund's 7800 index, which monitors funding positions on a section 179 basis, said liabilities were £1.7trn at the end of the month while assets totalled £1.6trn, leaving a deficit of £115.6bn. Liabilities had grown by £42bn over the month, while assets fell by £2bn, causing the deficit to grow by £43bn.
Nearly 200 schemes fell from surplus into deficit during the period, with 32% of schemes, or 1,792, recording a funding level above 100%., compared to 1,980 at the end of February.
The 2.5% increase in liabilities was blamed on falling gilt yields, with conventional 15-year gilt yields dropping by 19 basis points (bps), although index-linked 5-15-year gilt yields rose by 1bp. Over the month, the FTSE All-Share Index fell by over 2%.
Aviva Investors investment strategist for global investment solutions Boris Mikhailov said fears over a potential trade war between the US and China had led to a volatile equity market.
"The Trump-instigated trade war fears have dominated the headlines in March, creating a seesaw effect on global financial markets with equity markets plummeting and safe haven assets, such as gilts, rallying," he said. "In the UK, the continuing demand for gilts from pensions schemes and the Bank of England's asset purchase facility embarking on its £18bn reinvestment programme were also major forces driving up gilt prices over the month."
He added the fall in gilt yields would particularly have hit home, as DB schemes only hedge around a third of interest rate risk: "Any movements in long-term gilt yields would have three times more impact on its liabilities than the assets."
"The volatility in funding positions is nothing new or surprising. Until pension schemes make significant changes to their investment strategies, placing less reliance on equity markets and hedging much more interest rate risk, the funding level rollercoaster ride will continue," he continued. "Volatility across financial markets is only likely to increase this year so pension schemes need to brace themselves for an even choppier ride."
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