Every month, several firms issue trackers of the aggregate defined benefit (DB) scheme funding position. See here for the August 2019 estimates on the various measures…
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The aggregate defined benefit scheme funding level plummeted by 3.5 percentage points over the course of August as gilt yields collapsed, according to the Pension Protection Fund (PPF).
The lifeboat fund's 7800 index recorded the combined deficit rose by £72.2bn to £162.9bn over the month, leading to a funding level of 91.5% - the lowest since August 2017.
Total assets amounted to £1.7trn, while liabilities were recorded at £1.9trn.
The movement was largely due to a fall in gilt yields, with 10- to 20-year government-issued fixed interest bonds falling by between 20 and 30 basis points (bps). For the 5-to-15 -year index-linked gilts, yields fell by 22bps.
A similar downturn was experienced in the equity markets with the FTSE All-Share Total Return Index and FTSE All-World Ex-UK Total Return Index dropping by 3.6% and 1.7% respectively.
BlackRock head of UK fiduciary business Sion Cole said geopolitical events, including Brexit and the US-China trade war, were partly to blame.
"Whether a scheme is in surplus or deficit will largely have decided how schemes have fared in August," he said. "Generally speaking, better-funded schemes have more hedging and are taking less investment risk so will have coped better with the market turbulence."
The aggregate accounting deficit of FTSE 350 defined benefit (DB) schemes rose by £16bn over the course of August, says Mercer.
The consultancy found the month-end deficit was £67bn, with liabilities having increased by £30bn to £914bn, partially offset by a £14bn rise in assets, which landed at £847bn.
Mercer blamed the change on a 30 basis point reduction in corporate bond yields, with partner and corporate consulting leader Maria Johannessen noting the importance of hedging.
"August saw the largest monthly increase in the deficit in 2019, bringing it to highs unseen for nearly two years," she said. "Under-hedged schemes took the lion's share of the deficit hit. The overall increase was largely driven by a reduction in corporate bond yields, which meant that liability values increased by over 3% in just one month.
"As political uncertainty is likely to escalate, stakeholders need to take an active approach for monitoring the funding position and spotting opportunities to manage risks."
The aggregate funding level by 1.5 percentage points, ending the month at 92.7%, the index's lowest level since March 2018.
On a gilts-plus basis, scheme deficits surged by £100bn over the course of August, according to PwC's Skyval Index, as yields plummeted.
At the end of last month, the estimated shortfall for all DB schemes amounted to £340bn, with assets totalling £1.7trn, compared to liabilities at £2.1trn.
The funding level fell 4.2 percentage points from 87.8% to 83.6%, the lowest level published by the index since November 2017, when the figure was 77.6%.
The significant deterioration was due to the same collapse in bond yields noted by Mercer, which led them to a real-terms negative return compared to the Retail Prices Index.
PwC chief actuary Steven Dicker said: "The deficit is now twice the amount it was 12 months ago, taking us back to levels last seen in early 2018. Schemes that have significantly hedged their exposure in the meantime may be insulated from the worst of this but others will face difficult decisions around how they balance the demands of the pension schemes and their businesses."
The Universities Superannuation Scheme (USS) is expected to submit its 2018 valuation to The Pensions Regulator in the coming days, despite admitting it is “pushing their limits” in terms of acceptable risk.
Growing market volatility could adversely affect defined benefit (DB) schemes nearing buyout over the next five years, Barnett Waddingham says.
Almost all UK defined benefit (DB) schemes (92%) have set clear long-term funding targets, with most focused on buyout or self-sufficiency, according to Aon.
Melrose Industries has separated one of GKN's two defined benefit (DB) schemes into four sections allocated to the aerospace and automotive segments of the business, according to its half year results.
Just Group is exploring a defined benefit (DB) de-risking partnering approach as part of the development of a capital light fee business, according to its half-year results.