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Bond returns narrow deficits at UK DB pension funds

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Deficits at UK defined benefit pension (DB) schemes narrowed further last month as higher bond returns shaved 1.8% off liabilities, according to the Pension Protection Fund (PPF).

The aggregate deficit of the 6,150 schemes in the rescue fund’s PPF 7800 index fell to £59.7bn (€71.4bn) at the end of November from £75.6bn a month before, the fund estimated.

At the end of November 2012, the total deficit of the schemes had been £230.5bn.

On a section 179 basis, the schemes’ funding ratio rose to 95% from 93.8%, and was up from the 82.2% recorded in November 2012.

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Equity markets and Gilt yields were the main drivers of funding levels, the PPF said.

During the month of November, the DB pension scheme assets fell by 0.6% mainly as a result of falling UK equity markets and Gilt prices.

Liabilities, on the other hand, fell by 1.8% over same period.

This decline reflected higher nominal and index-linked Gilt yields, the PPF said.

It said movements in the PPF 7800 index illustrated the change in its exposure to the deficits in its universe of eligible schemes as a result of financial market movements.

It pointed out that the index did not take account of schemes’ use of derivatives to hedge market changes.

Looking at only those schemes in deficit, the aggregate shortfall was estimated to have fallen to £128.4bn at the end of November this year from £140.1bn a month before, and from £259.6bn at the end of November 2012.

The total surpluses of schemes in surplus rose to £68.7bn at the end of November from £64.5bn at the end of October, and from £29.1bn at the end of November 2012.

The number of schemes in deficit fell to 3,952 at the end of November from 4,063 a month earlier, and from 4,944 at the end of November 2012.

Meanwhile, consultants Barnett Waddingham said pension schemes were worried about whether they would be able to iron out mistakes in Experian data before the company replaced Dunn & Bradstreet (D&B) as the PPF’s rating provider next year.

In a survey, the consultancy found 90% of respondents either worried or were very concerned about the likelihood of companies successfully correcting errors or omissions in time for the change in April 2014.

The firm said its 2014 PPF Levy survey focused on the increase in the benefits cap for longer-serving members, as well as the D&B failure scores.

Nick Griggs, head of corporate consulting, said: “Our latest PPF survey findings highlight the real concerns trustees, employers and advisers have about the upcoming shift from D&B to Experian’s credit rating service.”

There will be winners and losers from the change, he said.

Companies have to act now to tackle any holes in their Experian data to make sure they are accurately rated and avoid an unjustified hike in their PPF levy, Griggs said.

Nearly half – 48% – of respondents support the increase in the benefits cap, while 28% do not, according to the study.

Some 49% of trustees and employers responding disagree or strongly disagree when asked if their company’s D&B score accurately reflects its risk of insolvency in the next 12 months.

Barnett Waddingham said many respondents thought the current model used by D&B was too rigid, with 64% saying they would be happy for Experian to use more judgement in adjusting the failure score, as long as the process was transparent.

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