PPF: DB universe drops back into red

James Phillips reports...

Defined benefit (DB) schemes fell back into deficit on aggregate over December as gilt yields and asset returns fell, the Pension Protection Fund (PPF) has said.

At the end of 2018, the combined funding level of 5,450 schemes was 98% with a deficit of £31.9bn on a section 179 basis, compared to 100.9% and a surplus of £14.3bn in November.

Some 3,271 schemes finished the year with a collective shortfall of £166.4bn, while 2,179 schemes held a surplus of £134.6bn. The deterioration was marked by a £9bn fall in asset values and a £37.2bn increase in liabilities.

While the month saw a significant worsening of funding positions, the figures are still considerably better than those recorded at the end of 2017. Over the course of the year, the funding position improved by 4.1 percentage points from 93.9%, while the deficit plummeted £71.9bn.

Yields of 10-, 15- and 20-year fixed interest gilts reduced by six basis points (bps), 13bps and 19bps respectively over the month – but throughout 2018 they had increased by 6bps, 4bps and 4bps.

Stock market volatility also clearly impacted, both in December and across the worst year for returns since 2008. The FTSE All-Share Total Return Index fell by 3.7% over December and 9.5% over the 12 months, while the FTSE All-World Ex-UK Total Return Index saw deteriorations of 7% and 3.1%.

BlackRock head of UK strategic clients Andy Tunningley said individual schemes had probably seen more dramatic falls than the PPF had recorded.

“While the PPF 7800 Index now sits 4.1 percentage points above where it started the year, in reality funding levels are likely to have fallen over the year as the PPF dataset and assumptions were updated in November,” he said.

“For those schemes which haven’t experienced demographic changes like the PPF dataset, funding levels could be down as much as 5% over the year.”

Schemes should be “wary of playing the long-game” on interest rates, he added, especially with the lack of clarity around Brexit and its impacts.

The PPF’s index follows to a similar path to those by JLT Employee Benefits and Mercer, which found deteriorations of 3.4 percentage points and 3.0 percentage points over December.