Self-sufficiency funding calms after Autumn volatility

Schemes with lower levels of hedging saw largest funding improvements

Jonathan Stapleton
clock • 2 min read
Broadstone's Nigel Jones says many risks remain
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Broadstone's Nigel Jones says many risks remain

Self-sufficiency funding level for fully hedged schemes dropped from 80% to 71% in 2022 but improved in November and December, latest figures from Broadstone show.

The Broadstone Sirius Index - a monitor of how various pension scheme strategies are performing on their journeys to self-sufficiency - found that market stability through November and December saw both its hedged and unhedged schemes steadily improve funding levels and reduce deficits after previous months of significant volatility.

It said that, while both schemes started the year at an 80% funding level, the scheme with only 50% of liabilities hedged ends the year at 95% compared to 71% for the fully hedged scheme's funding position.

Broadstone added that both model schemes have reduced their deficits as assets, liabilities and therefore the deficit are all much smaller now. In particular, it said buyout deficits ended the year much lower than the £18.5m where they started it. This has decreased to £13m where liabilities were fully hedged and £6m where only 50% of liabilities were hedged.

Broadstone head of consulting and actuarial Nigel Jones said: "After a volatile year, especially through the Autumn period, it is great to see that self-sufficiency funding levels have stabilised towards the end of 2022.

"This period of relative calm is now a useful time for schemes - whether they have hedged previously or not - to assess the impact of the turbulence we've seen in long-dated gilt yields."

He added: "Trustees and sponsors should be using this time to engage with their investment consultants and liability-driven investment managers to understand the impact on assets as well as reviewing their investment strategy and journey plan for the revised deficit."

Jones said the dramatic reductions in the gaps to buyout for sponsors of all shapes and sizes was further good news and consideration should be given to preparing for an approach to the insurance market in many cases.

But he warned the immediate macro-economic environment "remains murky". He said: "Trustees and sponsors should be mindful of the risks caused by any future falls in asset values stemming from rising long-term interest rates and/or impending recession.

"2022 may well have been a good year for the deficit size of schemes but many risks remain."

View Professional Pensions' PP DB Funding Index - a compilation of all the industry's funding measures, updated every month - here

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