DB funding - October 2020: Small rise in PPF 7800 deficit as second Covid-19 wave sets in

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PPF 7800

 The combined section 179 deficit of the UK's defined benefit (DB) schemes rose by £2.1bn to an estimated £168.2bn over the course of October, according to the Pension Protection Fund (PPF).

The compensation scheme's 7800 Index found that, while liabilities had fallen by £15.9bn to £1.9trn, this was mostly offset by a larger drop in asset values, by £18bn to £1.8trn. The overall funding level decreased by 20 basis points (bps) to 91.2%.

Over the month, 10-, 15- and 20-year fixed-interest gilt yields rose by 4bps, 5bps and 5bps respectively, while the 5-to-15-year index-linked gilt yield also rose by 3bps. However, the FTSE All-Share Total Return and FTSE All-World Ex-UK Total Return indices fell by 3.8% and 2.4% apiece.

Another 29 schemes fell into deficit throughout October, with a total of 3,617 schemes recording a combined shortfall of £279.5bn.

PPF chief finance officer and chief actuary Lisa McCrory said: "The drop [in funding level] was caused by a decrease in asset values due to a fall in bond and equity prices, the movement in bond yields also caused liability values to fall.

"We remain mindful that global market movements continue to be volatile in the second wave of Covid-19."

Buck UK head of retirement consulting Vishal Makkar said: "The aggregate deficit increased again during October, as markets continued to be plagued by the global pandemic and the reintroduction of lockdowns across Europe, as well as political turmoil in the US.

"In the UK, a return to lockdown for many and the continuation of rock bottom interest rates mean that the outlook for pension schemes remains shaky."

He also cautioned against the potential for a series of company collapses, adding pressure on the PPF.

PwC

Assets and liabilities both fell by £20bn over the course of October, leading to an unchanged gilts-plus deficit of £260bn, according to PwC's Pension Funding Index.

The consultancy said asset values had fallen to £1,760bn, while liabilities had also reduced to £2,020bn.

While the overall shortfall was static, the funding level fell by 20 basis points to 87.1% due to the asset and liability moves.

PwC head of global pensions Raj Mody commented: "The relative stability in pension deficits is a double-edged sword. On the one hand, it's good that pension scheme strategies are generally able to withstand market volatility. On the other hand, sponsors and trustees will want to eliminate deficits ultimately and need market outperformance to help with that.

"It's not clear with upcoming headwinds when markets will deliver what pension funds need."

The firm continued to urge schemes to look beyond the funding level, however, with Mody agitating for a more holistic health check.

"Just considering the pension scheme deficit would be like your doctor just checking your blood pressure," he said. "One test in isolation is not going to give you the full picture.

"There are many dimensions to pension fund financial management which all need careful management."

The index used to be based solely on data from PwC's pension platform Skyval, but has now been expanded to use a wider range of the firm's data sources.

Mercer

FTSE 350-sponsored defined benefit (DB) schemes recorded a combined deficit of £75bn on an accounting basis at the end of October, Mercer says.

The £2bn increase in the shortfall over the month came on the back of falling asset and liability values. While the former dropped by £6bn to £871bn, assets fells further by £8bn to £804bn.

Overall, the funding ratio fell by 30 basis points to 91.4%.

Chief actuary Charles Cowling said: "Covid-19 storm clouds are gathering again as markets prepare for a second wave of coronavirus and the impact that wide-ranging lockdowns will have on global economic growth. In the UK, the latest data from the Office for National Statistics reveals the economy is growing slower than forecast, remaining at 9.2% below its pre-pandemic peak."

In addition, schemes face a weakening economic outlook with confusion over the short-term future for the Bank of England base rate and quantitative easing, as well as geopolitical uncertainty from the US presidential election and Brexit.

Cowling said all of this indicates "further risk for pension trustees at a time when many employers are facing challenges and covenants are under big pressure".

He concluded: "Trustees are therefore urged to monitor their situation wisely and seek opportunities to reduce risk where possible."