The gap between assets and liabilities of UK defined benefit (DB) pension schemes widened still further last month, with deficits reaching the deepest level recorded as long-term bond yields declined further, according to data from the Pension Protection Fund (PPF).

The UK pensions lifeboat released its latest PPF 7800 Index bulletin, which revealed that the aggregate deficit of the 5,945 schemes in the index has increased to an estimated £408.0bn (€477.8bn) at the end of July – the highest level recorded by the index – up from a £383.6bn deficit at the end of June.

The average funding ratio of the schemes deteriorated to 77.4% at the end of July from 78% the month before.

Total assets were £1,401bn at the end of July, while total liabilities were £1,808.9bn, and 5,020 schemes were in deficit and 925 in surplus.

The index shows the latest estimated funding position of DB schemes in the PPF’s universe, on a section 179 basis.

Simply put, section 179 liabilities represent the premium a scheme would have to pay an insurer to take on the payment of PPF levels of compensation.

Noting that equity markets and Gilt yields were the main drivers of funding levels, the PPF said that, during July, when scheme liabilities had grown by 3.5%, conventional 15-year Gilt yields fell by 24 basis points, while index-linked 15-year Gilt yields fell by 3bps.

Meanwhile, scheme assets rose by 2.8% in the month, reflecting the impact of both higher Gilt prices and stock markets.

The FTSE All-Share Index has climbed by 3.9% in July.

Andy Tunningley, BlackRock’s head of UK strategic clients, said the rise in equities last month has not been enough to combat a further drop in already low yields, and that this had brought the index down to its lowest funding level ever. 

“The tremors following the UK’s decision to leave the EU continue to be felt,” he said.

“The path of future rates is likely to be even lower for an even longer period, confirmed by the Bank of England’s decision to cut the Bank Rate to 0.25% and indications there could be further cuts to around zero.”

Recent business activity and sentiment surveys suggest there will be scant economic growth in the UK in the rest of this year, he said.

“Covenant risk could increase in this more uncertain environment, with sponsors being less willing or able to increase future scheme contributions,” he said.

He said BlackRock’s view had long been that most schemes should be taking less risk and increasing their liability hedge ratios.

“Recent political and economic events make this even more critical,” Tunningley said.

Last week, the UK’s Pensions and Lifetime Savings Association called on the Pensions Regulator “to take a proportionate and flexible approach” to scheme funding, in the wake of the Bank of England’s monetary easing plan, which sent DB deficits to new highs.