Funding across the UK defined benefit sector fell to new record lows in August, despite the Pension Protection Fund (PPF) 7800 index revisiting its own estimate of assets held by nearly 6,000 schemes.

The lifeboat fund’s monthly estimate calculated an aggregate deficit of £459.4bn (€538bn) at the end of last month, equivalent to a system-wide funding level of 76.1% and down by more than 3 percentage points month on month.

It also estimated liabilities across the 5,945 DB funds stood at £1.9trn, up by more than £100bn since July and an increase of £430bn year on year.

Andy Tunningley, head of strategic clients at BlackRock, noted that funding ratios had dropped for the fourth consecutive month.

“To compound matters,” he added, “the goalposts have shifted even further away, as the costs of insuring pension liabilities – already elevated for non-pensioner liabilities – are likely to have risen further given compressed corporate-bond spreads.”

The increase would have been starker had a new estimate of pension assets by the PPF not seen a 2%, or £31.2bn, upward revision of total assets under management.

“The return from growth assets in August was no match for ballooning liability values,” Tunningley said.

“The key driver of increasing liabilities continues to be Gilt yields, which fell materially as the Bank of England cut interest rates and announced a package of new quantitative easing.”

Boris Mikhailov, investment strategist for global investment solutions at Aviva Investors, agreed.

“As a result, most pension schemes’ assets lacked pace and did not increase in value by as much as their liabilities,” he said.

“This is due to their under-hedged position in rates, which continue to drive deficits up as yields fall.”

Topics

Related Companies