UK DB funding ticks higher in September but still near historic lows

Deficits in UK defined benefit (DB) pension schemes shrank slightly in September, but funding levels were still hovering near historic lows and well below levels seen this time last year, according to data from the Pension Protection Fund (PPF).

The UK’s pension fund rescue vehicle reported that the average funding ratio for the DB schemes potentially eligible for entry to the PPF had risen to 77.5% by the end of September from 76.1% at the end of August.

However, this is still well below the 82.8% level reported at the end of September 2015, on a section 179 (s179) basis.

A scheme’s s179 liabilities broadly represent the premium it would have to pay an insurance company to take on the payment of PPF levels of compensation.

The aggregate deficit of the 5,945 schemes in the PPF 7800 Index was estimated to have fallen to £419.7bn at the end of September 2016 from £459.4bn at the end of the previous month, but it was still down from the £260bn reported for September 2015, according to the PPF.

Aggregate assets grew by about £10bn from August to September, and liabilities shrank by around £50bn, according to the data.

Andy Tunningley, head of UK strategic clients at asset manager BlackRock, said: “UK pension funds remain in urgent need of life support.”

The aggregate funding ratio has allowed “a faint pulse” to be found as it halted its downward spiral in September, he said.

He added that contracting liability values had compensated for weak returns from growth assets, resulting in an overall positive impact on funding levels.

“A sell-off in UK government bonds, causing yields to rise and liability values to fall, was linked to an announcement at the end of the month that a UK parliamentary committee is to investigate proposals allowing UK private sector pension schemes to temporarily amend or suspend inflation-linked pension increases,” Tunningley said.

Even though no details have been confirmed, it is assumed this so-called “conditional indexation” will help challenge DB schemes by decreasing the value of liabilities, strengthening funding status and reducing insolvency risk, he said. 

However, he said the firm would warn clients not to change portfolio allocation just because of these developments. 

“Not only would this consultation likely be advisory only – i.e. with no requirement for the government to follow its recommendations – it is likely to be highly political, with strong voices on either side of the debate, and it is not clear what changes, if any, will result,” he said.