DB funding - February 2021: PPF 7800 records surplus but warns of sensitivity to bond yields

James Phillips
clock • 4 min read

Every month, several firms issue trackers of the aggregate defined benefit (DB) scheme funding position. See here for the February 2021 estimates on the various measures…

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PPF 7800

The section 179 funding position of defined benefit (DB) schemes improved from a deficit of £65bn to a surplus of £14.6bn in February, according to the Pension Protection Fund (PPF).

The compensation scheme's 7800 Index said bond yield movements had helped eliminate the funding shortfall, with both assets and liabilities falling in value over the month.

Assets dropped by £68.2bn to £1,740.2bn, while liabilities plummeted by £147.8bn to £1,725.6bn. Overall the funding level rose by 4.3 percentage points to 100.8% — the first time it has been over 100% since April 2019.

Chief finance officer and chief actuary Lisa McCrory said: "Improvements were driven by an increase in bond yields which reduced the value of bonds and led to a fall in the value of liabilities and assets. While this is welcome news, it's a reminder of how sensitive the funding is to yield movements as many schemes don't completely hedge this risk.

"Despite this strong position, we recognise the situation remains uncertain."

Over the month, yields on 10-, 15- and 20-year fixed interest gilts rose by 51 basis points (bps), 51bps, and 49bps respectively, while the 5-to-15-year index-linked-gilt saw a 24bps increase in yield.

Meanwhile, the FTSE All-Share Total Return and FTSE All-World Ex-UK Total Return indices rose by 2% and 0.5%.

The number of schemes estimated to have a deficit fell by 310 to 2,839 in February, with their combined shortfall amounting to £154.4bn.

Buck head of retirement consulting Vishal Makkar said: "The aggregate position of the schemes in the PPF's index moved from deficit into surplus during February, as the release of the government's roadmap provided some much-needed stability for the UK market.

"In particular, a marked increase in global bond yields, including UK gilts, has led to a lower value being placed on the PPF's liabilities. The clear timeline for the UK's reopening, combined with the ongoing success of the vaccine rollout has provided a light at the end of the tunnel and this will be a particular relief for heavily affected sectors, such as hospitality, retail and travel."

He added that Budget confirmation of the extension of the furlough scheme and further government support for businesses would prevent near-term company collapses but potentially creates a cliff-edge as support is unwound.


Defined benefit (DB) schemes hit neutral funding on a gilts-plus basis in February after eliminating a £120bn deficit in the month, according to PwC.

The firm's monthly index showed a funding level of 100%, up from 93.8%. Although assets fell in value by £30bn to £1.8trn, this was more than offset by a £150bn drop in liabilities, also to £1.8trn.

This is the highest level ever published by the index, which began at 67.1% with a £710bn deficit in August 2016.

Partner and head of pensions Raj Mody said: "It's reassuring that UK DB pension schemes have neutralised their deficits in aggregate. This is no surprise given the recent combination of continued deficit repair payments and slightly more favourable market conditions.

"However, it would be wrong to think the position for pension schemes is now sorted for good. It's not necessarily the case that the recent improvement in forecast long-term yields is here to stay.

"There's an urgency now for trustees and sponsors to really understand their own unique situation, and see whether they are in a position to lock in a strong status, instead of running unnecessary risk or requiring more financing."

PwC's adjusted funding index, which incorporates higher returns and a different approach to account for potential longevity improvements, saw schemes move into a significant aggregate surplus of £180bn, up from £70bn. On this basis, schemes were 111.3% funded.


On an accounting basis, FTSE 350 DB scheme deficits grew by £13bn to £79bn over February, according to Mercer.

As assets fell by £44bn to £779bn and liabilities also fell by £31bn to £858bn, the aggregate funding level dropped by 1.8 percentage points to 90.8%.

Chief actuary Charles Cowling said: "Markets are showing signs of nervousness. Chancellor Rishi Sunak will deliver his Budget on Wednesday at a time when government finances are shaky and borrowing is at record levels. The chancellor needs to raise taxes to pay for the spiralling debt but there are dire warnings from nearly all commentators that the UK economy cannot take tax rises at present and additional support for the UK economy is needed."

Alongside concerns over inflation and interest rate risk, he said these were "testing times for pension schemes", particularly those with sponsors who have been hit hard by the pandemic.

Nevertheless, with increased de-risking, "the situation is not gloomy for all trustees", he said, adding: "Pension scheme deficits can be filled only by investment performance or additional funding from employers. De-risking, reducing the potential for future investment gains, can make the pension scheme numbers appear worse, increasing employer funding, and increase pressure on employers.

"In these challenging times, pension trustees should monitor their risks carefully and should consider taking opportunities to reduce them when and where possible."

James Phillips
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James Phillips

Professional Pensions journalist from 2016-2022

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