Sharp improvement in UK DB funding during April

The aggregate funding position of UK defined benefit (DB) schemes improved dramatically during April, according to new figures from the Pension Protection Fund (PPF).

The aggregate deficit of UK DB schemes in the lifeboat scheme’s 7800 Index fell from £115.6bn (€131.7bn) at the end of March to £81.7bn at the end of April – an improvement of more than 29%.

The data meant that UK schemes were on aggregate 95% funded.

Assets rose to £1.58trn, from £1.57trn a month earlier, while total liabilities declined from £1.68trn to £1.66trn.

The PPF’s data reflected other estimates from leading UK consultants that all indicated improvements during April.

JLT Employee Benefits estimated that, across all UK private sector DB schemes, the aggregate shortfall fell during the month to £78bn, from £131bn at the end of March.

Assets grew by 1.3% while liabilities shrank by 2.1%, JLT reported.

FTSE 100 company DB schemes were almost fully funded at the end of April, JLT’s data showed, with an aggregate funding ratio of 98% – its best position in nearly 10 years.

Mercer estimated that the combined shortfall of FTSE 350 company DB schemes fell by £19bn during last month – the largest monthly funding improvement since the end of 2016.

PwC also reported a significant fall in its estimated UK DB deficit for all private sector schemes, from £450bn at the end of March to £200bn at the end of April. PwC’s Skyval index typically produces a higher estimate than other firms as it uses a ‘gilts-plus’ methodology.

Boris Mikhailov, investment strategist in Aviva Investors’ global investment solutions team, said fears of trade wars had reduced, boosting equities, while demand for gilts had fallen slightly due to falling demand for liability-driven investment strategies.

Alan Baker, head of DB solutions development at Mercer, warned that asset values had remained broadly static “for several months” while liabilities had been volatile.

This demonstrated “the importance of trustees and sponsors understanding the overall level of risk facing their pension scheme”, Baker said. “Trustees and sponsors should ensure they have plans in place to protect them from any downside and to ensure their exposure is in line with their risk appetite.”

Charles Cowling, director at JLT Employee Benefits, added that the Bank of England’s decision on interest rates would be “crucial” for schemes in the next few months.

“It had been thought quite likely that the Bank of England’s Monetary Policy Committee would raise interest rates at their next meeting on May 10th but the latest weak GDP growth figures may once again have put back the date of the next interest rate rise,” he said.

“Additionally, the Bank of England is currently debating introducing greater clarity in its future interest rate plans, which would be of significant interest to pension schemes as they seek to plan and navigate their derisking paths.”