The October update of the UK’s Pension Protection Fund 7800 Index found that at the end of September the aggregate surplus increased over the month from £313.8bn at the end of August to £374.5bn by the end of September, despite the current turmoil of investment markets in the UK.
The index captured the impact of government bond yield increases on liabilities but the impact on assets is less accurate.
“This is because we do not hold sufficient data to capture the impact of any structural changes to asset allocations made to meet collateral calls over the month nor do we have sufficient information to accurately capture changes in any leveraged LDI portfolios. This will also impact the accuracy of the reported proportion of schemes in deficit,” it said.
For the 5,215 schemes in the PPF 7800 Index, the funding ratio increased from 125.1% at the end of August 2022 to 134.8%, while total assets stood at £1.5trn and total liabilities at £1trn.
Vishal Makkar, head of retirement consulting at Buck, said: “Despite remaining in surplus, it’s certainly not been plain sailing with trustees managing investment issues around the spiking Gilt yields and the mini-budget which caused volatility in the pound and turmoil in the financial markets.”
He highlighted concerns due to the potential impact on the security of members’ benefits as well as the risks embedded in the use of liability-driven investment (LDI) strategies by defined benefit (DB) schemes.
“The increased funding levels, however, demonstrate that schemes have not been as negatively affected as headlines would suggest,” he said, adding that with the Bank of England stepping in to rein in Gilt yields and reduce volatility this should allow schemes to manage their liquidity requirements and investments better.
Rhian Littlewood, senior business development manager at Standard Life, part of Phoenix Group, said: “Although we expect volatility in this uncertain economic climate, this improved funding position has made insurance more affordable for many schemes and the possibility of a buy-out seem closer than in previous years, opening up new opportunities for schemes to pursue derisking activity.”
She noted that the competitive insurance landscape is also providing attractive levels of pricing due to the recent rise in Gilt yields, and he anticipates that pension funds will be looking at how they may be able to lock in this opportunity.
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