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Market volatility hits funding at UK defined benefit schemes

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UK defined benefit (DB) funds saw a steep rise in deficits over the course of January, as volatile equity markets led to the average scheme seeing its funding ratio fall by nearly 5 percentage points.

According to the Pension Protection Fund (PPF) 7800 Index, deficits at the end of January stood at £304.9bn (€400bn), an increase of £82.5bn from the end of 2015.

The surging deficit saw aggregate funding across the 5,945 DB funds fall from 84.9% at the end of December to only 80.5% at the end of January, meaning only an estimated 1,000 schemes remained in surplus.

Commenting on the results, BlackRock’s Andy Tunningley, head of UK strategic clients, said investors’ concerns over low oil prices and the sell-off of Chinese stocks was impacting the global equity market.

“This led to negative equity returns for UK pension funds, but UK asset valuations nevertheless rose, as bad stock performance was more than offset by falling government bond yields, boosting fixed income performance,” he said. 

Tunningley added that investors that had not hedged currency exposure benefited from the appreciation of the dollar and euro against the sterling.

“Despite this increase in assets,” he added, “falling yields caused a more substantial increase in liability valuations for UK pension funds, thereby resulting in lower funding levels.”

January ended with DB funds in a better position than they were at the beginning of 2015, when the aggregate deficit was estimated at £367.5bn, reflecting a funding ratio of 77.6%.

Overall, the number of DB funds captured by the PPF index fell by more than 100 over the course of the year, ending January 112 funds lower than in January 2015.

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