Every month, several firms issue trackers of the aggregate defined benefit (DB) scheme funding position. See here for the September 2020 estimates on the various measures…
The latest positions
PPF 7800
September saw a £25.7bn increase in the combined section 179 deficit of defined benefit (DB) schemes in the Pension Protection Fund's (PPF) 7800 Index.
The monthly update revealed the aggregate shortfall had increased from £140.4bn to £166.1bn over the course of the month, with the respective funding level falling from 92.6% to 91.4%.
While assets had grown in value from £1,755bn to £1,771bn, this was offset by liabilities surging from £1,895bn to £1,938bn.
Over the month, the 10-, 15- and 20-year fixed-interest gilt yields fell by 9, 11, 12 and 10 basis points (bps) respectively. The 5-to-15-year index-linked gilt yield fell by 10bps.
Meanwhile, the FTSE All-Share Total Return Index dropped by 1.7% while the All-World Ex-UK equivalent rose by 0.4%.
A further 82 schemes fell into deficit during the month, bringing the total to 3,588 - representing 66% of all schemes - and together holding a combined shortfall of £279.6bn.
Chief finance officer and chief actuary Lisa McCrory said: "The movements were caused by a decrease in bond yields driving up the value of liabilities which were to a certain extent offset by an increase in asset values, due to higher bond prices.
"While we expect to see increased claims in the future due to Covid-19, we remain confident we are on a strong footing to continue to protect the UK DB pensions universe."
Last week, the PPF's annual reports and accounts showed a deterioration in its funding level, reserves and probability of success on the back of pandemic-induced economic conditions. It also last month announced proposals to reduce the PPF levy to help schemes and their sponsors through the crisis.
Buck head of retirement consulting Vishal Makkar commented: "While smaller schemes in particular will welcome a proposed decrease in their PPF levy, this month's increase in the aggregate deficit, combined with the recently released figures on the performance of the lifeboat fund, make for worrying reading. The PPF's funding level has fallen to its lowest level since 2014, an unnerving sign at a time when schemes continue to face existential threats."
Skyval
The funding shortfall of the UK's defined benefit (DB) schemes grew by £30bn on a gilts-plus basis over the course of September, according to PwC's Skyval index.
The professional services firm recorded a £260bn deficit at the end of the month after liability growth offset a rise in asset values.
While assets rose by £20bn to £1.8trn, liabilities grew by £50bn to £2trn. Overall, the funding level depreciated by 1.1 percentage points to 87.3%.
PwC head of global pensions Raj Mody said it was necessary for trustees to understand their scheme-specific prudence and funding reserves rather than rely on the single deficit figure.
"[Trustees] need to know how much extra margin is built in in pound sterling terms, not hidden in opaque, technical assumptions which are difficult to interpret for the non-expert. There should also be a plan for what would happen if those extra reserves aren't needed, as otherwise the pension fund might become overfunded and tie up precious cash which companies could use to invest in their business and jobs.
"We'd encourage trustees to own their destiny when it comes to scheme funding approaches and regulatory requirements. If they can justify their own bespoke approach, and break out of the trap of measuring everything purely with reference to gilt yields, then this could be better for all stakeholders. Prudence is a good thing, but over-prudence might not be."
In its response to The Pensions Regulator's recent consultation on the principles to underly a revised DB funding code PwC urged the watchdog to ditch its gilt-based valuation approach. Mody urged for a cashflow-driven approach to valuations, noting: "You could have no actuarial deficit, but still have a cashflow problem, or appear to have a deficit but actually your cashflows are in really good shape."
Mercer
The combined accounting deficit of FTSE 350 sponsored schemes grew by £3bn over the course of August, according to Mercer.
At the end of the month, the overall shortfall amounted to £73bn, with a £5bn growth in assets to £804bn offset partly by the £8bn rise in liabilities to £877bn.
The consultancy's index was refreshed recently to account for the most recent company filings, as well as changes to the composition of the FTSE 350.
The overall FTSE 350 pension funding level fell by 20 basis points to 91.7%.
Chief actuary Charles Cowling commented that the steady month was against a backdrop of continuing geopolitical and economic uncertainty, including Brexit and the US presidential election.
He said: "All this uncertainty creates more risk for pension trustees whilst many employers are going through serious challenges within their own businesses. In addition, The Pensions Regulator has just concluded a consultation on the framework for the regulation of pension schemes which could encourage trustees to target more prudent long-term funding objectives, adding further strain on already stretched finances."
Partner and corporate consulting leader Maria Johannessen added: "With all this systemic risk in the economy corporates and trustees are urged to monitor carefully and be ready to seize opportunities to manage risk. Now may be a good time for trustees to consider a move to contractual cashflow-matching investments."
