Every month, several firms issue trackers of the aggregate defined benefit (DB) scheme funding position. See here for the December 2020 estimates on the various measures…
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The aggregate shortfall in defined benefit (DB) scheme funding rose by £75.5bn over the course of 2020 on a section 179 basis, the Pension Protection Fund (PPF) says.
The PPF 7800 Index recorded a deficit for its universe of 5,318 DB schemes of £86.4bn at the end of 2020, compared to £78.8bn at the end of November, and £10.9bn at the end of 2019.
While assets had grown by £134.1bn, or 7.9%, to £1.8trn during the 12 months, liabilities also surged by £209.6bn, or 12.3%, to £1.9trn.
The aggregate funding level dropped by 30 basis points to 95.5% between November and December, or 3.9 percentage points since the end of 2019.
The number of schemes in deficit fell by ten to 3,206 between November and December, although their combined deficit rose by £8.9bn to £230.3bn.
The index recorded 10-, 15- and 20-year fixed-interest gilt yields falling by 60bps, 62bps, and 60bps over 2020, while 5-to-15-year index-linked gilt yields dropped by 59bps. The FTSE All-Share Total Return Index fell by 9.8%, while the FTSE All-World Ex-UK Total Return Index rose by 14.3%.
Chief financial officer and chief actuary Lisa McCrory said: "Our latest PPF 7800 Index as at 31 December showed a relatively stable funding position over the final month of the year. Overall, the 5,318 schemes reported that while the funding ratio was broadly unchanged, the aggregate deficit has increased slightly by £7.6bn to £86.4bn.
"2020 was an extremely challenging year as the Covid crisis impacted market movements, and further challenges are expected in 2021."
BlackRock head of UK fiduciary business Sion Cole said assets had a strong month despite inflation expectations falling, Brexit uncertainty, and the new strain of the coronavirus, but this was not enough to offset liability growth.
He added: "Any schemes with high liability hedge rations and a flexible, dynamic growth portfolio will have fared better."
The aggregate FTSE 350 defined benefit (DB) scheme deficit ended 2020 at £70bn on an accounting basis, up from £40bn the year prior, according to Mercer.
The consultancy recorded asset values of £844bn and liability values of £914bn at the end of December, compared to £775bn and £815bn respectively in 2019.
Compared to November, however, the deficit had fallen by £7bn, resulting in the funding level rising from 91.4% to 92.3%.
Chief actuary Charles Cowling commented: "2020 was strange and difficult, not to say unprecedented, for everyone as well as for pension schemes. Though it could appear there was no major impact on pension schemes, the relatively modest reduction in funding levels hides far more dramatic consequences of a really challenging year for some."
He said parallels could be drawn with the 2008 financial crisis where, beforehand, schemes had built up accounting surpluses but were hit hard by the impact of quantitative easing. He said, however, that there were two big differences.
"Firstly, total pension liabilities are now more than twice the size of pension liabilities in 2009 - despite the large majority of private sector pension schemes closing to new accrual and record levels of pension buyouts and other liability settlements. With bigger pension schemes comes bigger risk, and many of the old industry businesses have failed to keep up with the growth in their pension schemes. Moreover, not all trustees have taken advantage of opportunities to de-risk their pension schemes and some are much more exposed to market volatility."
"The second big difference with this crisis is that many businesses have suffered very significant shocks, that threaten the strength of the employer covenant available to support the pension scheme and even threaten the very existence of many businesses. This is particularly the case in the hospitality, retail and travel sectors, but applies right across British industry as the pandemic has accelerated radical changes in work and lifestyles. This means that trustees have had to monitor the strength of employer covenants more closely than ever before."