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UK funding deficit halved in January despite equity downturn

The aggregate funding position of UK defined benefit (DB) pension schemes improved in January despite the equity market volatility that hit investors towards the end of the month.

Data from the Pension Protection Fund showed the aggregate shortfall across 5,588 schemes halved during the first month of 2018 to £51bn (€57.5bn). Schemes were on aggregate 97% funded, compared to 94% at the end of December.

Combined assets fell by 0.9%, but rising government bond yields pushed down liabilities by 3.9%.

Andy Tunningley, head of UK strategic clients at BlackRock, said schemes had on aggregate 10% less in equities than five years ago, meaning they were better protected from stock market volatility.

“Holding cashflow generative assets, such as government bonds, credit and private market debt, can help protect pension schemes during an equity shock like the one experienced in January,” he added. “We find that for cashflow-negative schemes with funding gaps to close, equity shocks can be very problematic if the scheme is relying on disinvestment to fund cash outflows.”

Tunningley highlighted that hedging opportunities were available for some pension funds regardless of the future path of equity markets.

“For those looking at reducing funding level risk, market conditions today look particularly favourable,” he said. “Linker dealing spreads are tight, repo can be accessed readily and cost effectively, meanwhile 10-year swap rates are back to pre-Brexit levels. Whether or not volatility persists in global markets, these are attractive opportunities for UK pension schemes.”  

DB funding estimates from consultants were less emphatic.

JLT Employee Benefits estimated that the combined DB deficit across the private sector fell by 17% during January, from £150bn to £124bn.

According to Mercer, the DB schemes attached to FTSE 350 companies were only marginally better funded at the end of January than they were at the start, as the combined deficit shrank from £76bn to £73bn.

The FTSE All Share index fell 1.9% in sterling terms in January, and lost 4.1% this month up until 12 February.

The yield on UK 10-year gilts rose from 1.19% on 1 January to 1.51% at the end of the month. It has since risen to 1.6%, its highest level since April 2016.

How UK DB pension deficits have changed since 2015

How UK DB pension deficits have changed since 2015

Source: Mercer, JLT Employee Benefits, PPF 

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