DB funding - November 2020: Deficit plummets by £47bn in positive month for markets

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PPF

The aggregate s179 deficit of schemes in the Pension Protection Fund's (PPF) universe fell by £47.2bn over the course of November, the lifeboat fund says.

According to its PPF 7800 Index, the shortfall amounted to £78.8bn at the end of the month, down from £126bn, after assets grew by £33bn to £1.8trn, while liabilities fell by £14bn to £1.9trn.

The index's figures since March have been restated to account for updated actuarial assumptions within the PPF's Purple Book, published last week, which showed that scheme allocations to bonds were continuing to increase.

The number of schemes covered by the index has also fallen from 5,422 to 5,318, with 60.5% of these in deficit at the end of last month.

During November, 10-, 15- and 20-year fixed interest gilt yields rose by five, four, and three basis points (bps) respectively, while the 5-to-15-year index-linked gilt yield rose by 5bps.

Meanwhile, the FTSE All-Share Total Return and FTSE All-World Ex-UK Total Return indices rose by 12.7% and 8.7% respectively.

BlackRock head of UK fiduciary business Sion Cole said funding levels had been aided by both resurgent equities on the back of vaccine and Joe Biden's election as US president, as well as outperforming higher-yield and emerging market fixed income.

He continued: "Pension schemes were also helped further by a slightly fall in liability values, resulting from slightly higher yields and marginally lower inflation expectations. However, as interest rates are not likely to rise significantly in the near future, we would continue to encourage trustees to ensure that they are well-hedged, instead using their risk budget to diversify into alternative assets or other growth assets which can help lead to a smoother funding journey."

With uncertainty continuing on both the pandemic and Brexit, BlackRock advocated a "well-diversified portfolio which looks beyond traditional asset class labels", in particular avoiding concentration in particular geographies or asset classes.

PwC

The gilts-plus deficit of UK defined benefit (DB) schemes fell by £70bn to £190bn over the course of November, according to PwC.

The firm's funding index recorded a £40bn climb in the value of assets, to £1.8trn, while liabilities reduced by £30bn to £2trn.

Overall, the funding level rose by 3.4 percentage points to 90.5%, its highest level since last December, when it was 91.1%.

But PwC also published an "adjusted funding index", taking into account how two strategic changes to investments would improve funding positions. The index estimates funding levels based on a shift towards higher-return cashflow-generating assets, instead of gilts, and the use of a deferred approach to funding long-term longevity improvements that are yet to materialise.

On this basis, PwC estimated a £10bn surplus, and a funding level of 100.6%, after total liabilities were slashed by £200bn.

Global head of pensions Raj Mody said: "Most pension fund trustees and sponsors have become conditioned to a world where there is always a funding deficit. The adjusted funding index illustrates that it doesn't have to be that way. You would hope that after years of paying in cash to pension schemes to repair deficits, then eventually that plan would have worked out.

"Trustees and sponsors should review their strategy and deficit assessment afresh, without being tied to historic approaches or assumptions which may now be out of date."

PwC said this approach to measuring funding levels would be most appropriate for schemes with strong sponsors who are focused on run-off strategy as opposed to bulk annuities or consolidators.

Pensions actuary Emma Morton added: The £190bn deficit represents money that companies are planning to pay into their DB pension schemes over the next decade or so. In a lot of cases this money won't be needed - or, at least, it isn't needed yet.  

"In the current economic environment, trustees and sponsors could be asking themselves whether there are more efficient ways of running pension schemes. This would allow spare company cash to be directed elsewhere, such as topping up pension accounts for defined contribution members who typically have lower pension values than defined benefit members."

 

Mercer

FTSE 350 schemes experienced a small increase of £2bn in their combined accounting funding deficit over the course of November, according to Mercer.

The consultancy recorded a funding shortfall of £77bn after the minor deterioration, which came amid big shifts in asset liability values.

While assets grew by £24bn over November, rising to £820bn, liabilities also increased by £26bn to £897bn. Overall, the funding level remained the same at 91.4%.

Chief actuary Charles Cowling commented: "Markets and pension scheme funding levels continue to hold up against a volatile environment. This is largely in response to hopes of a successful vaccine rollout over the next few months."

But he noted that continued Covid restrictions, Brexit, quantitative easing (QE) and inflation reform would add further pressures.

"At some stage, QE is going to have to be unwound, although that's unlikely to happen any time soon," he said. "In the interim the impact of QE is to keep interest rates low and pension scheme liabilities high."

He continued: "The outlook of lower interest rates for longer and changes to the inflation index mean that hedging strategies may need to be reviewed. Trustees should consider reviewing their approach to hedging assets and liabilities to ensure their strategy remains optimal."

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• Topics
• Defined Benefit
• DB
• Skyval index
• skyval
• PwC
• Mercer
• PPF 7800 Index
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• Pension Protection Fund