PPF 7800 deficit grows by £16bn at the end of 2017

Written by Talya Misiri

The combined deficit of the schemes in the PPF 7800 grew by £16bn at the end of 2017, it has been reported.

According to the PPF 7800 Index, the aggregate deficit of the 5,588 schemes is estimated to have increased over the month to £103.8bn at the end of December 2017 from £87.6bn at the end of November 2017.

As a result, the funding ratio dropped from 94.7 per cent at the end of November to 93.9 per cent. Nonetheless, the funding position has improved from the same time the previous year, which recorded a deficit of £223.9bn and a funding level of 86.6 per cent at the end of December 2016.

At 31 December, total assets were £1,589.5bn and total liabilities were £1,693.3bn. Of the schemes in the PPF 7800 universe, there were 3,710 schemes in deficit and 1,878 schemes in surplus.

BlackRock head of UK strategic clients Andy Tunningley commented: “UK pension schemes faltered at the end of the year. Despite buoyant equity markets boosting pension scheme asset values, real and nominal gilt yields drifted lower again over the month. However, looking back at 2017, it could be considered a purple patch for UK schemes. Although some of the improvement is due to the adoption of the latest Purple Book dataset in November, 2017 was a year in which return-seeking assets materially out-performed liabilities.

“New year is a time for reflection and change. So, should it be ‘New Year, New Strategy’ for pension schemes that find themselves at a better starting point than last year? We don’t propose ‘big bang’ changes to investment strategy; we expect risk assets to perform well again in 2018, meaning pension schemes can again benefit from exposure to these markets – particularly equities and alternatives. We’d suggest a typical pension fund adopts a modest bias towards these asset types – but be wary of pockets of overvaluation in certain private markets.

“Schemes should look at de-risking as funding levels improve, but affordability should be considered when doing so. For instance, tilting a portfolio towards buy and hold investment grade credit is a popular de-risking strategy – and theoretically appealing because it gives the pension scheme better visibility on future cash inflows and total return. However, today’s lofty credit market valuations mean the return being ‘locked in’ is low. We suggest schemes hold a balanced portfolio – equities, LDI, and private market cashflow generative assets all have their place – and buy and hold credit should be phased in as schemes can afford to do so, i.e. when funding levels improve or when better entry levels arise. When making asset allocation decisions, schemes should consider the risk, return and cashflow of each asset and not fall in to the trap of fixating on just one of these elements.”

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