DB pension scheme funding improves during November

The aggregate deficit of UK defined benefit (DB) pension schemes declined from £126bn to £78.8bn during November, the Pension Protection Fund’s (PPF’s) latest 7800 Index has revealed.

As of 30 November 2020, the funding ratio stood at 95.8 per cent, up from the ratio of 93.3 per cent observed at the end of October.

Aggregate assets increased by 1.9 per cent (£32.9bn) during the period to £1,799bn, while liabilities fell by 0.8 per cent (£14.3bn) to £1,878bn.

“The 5,318 schemes in the PPF 7800 Index have shown an improved funding position in November 2020,” commented PPF chief finance officer and chief actuary, Lisa McCrory.

“This has been caused by increased equity prices and bond yields which have led to better asset values and lower liability values.

“As a result of market movements, the funding ratio has recovered by 2.5 per cent to 95.8 per cent at the end of November 2020, and the deficit of schemes in deficit is also down by £31.8bn to £221.4bn. The improved position is against the backdrop of a continuing challenging environment.”

In comparison to November 2019, assets had risen by 5.4 per cent and liabilities had increased by 7.3 per cent.

As of 30 November 2020, there were 3,216 DB schemes in deficit and 2,102 schemes in surplus, with the number of schemes in deficit falling by 81 over the month.

The deficit of the schemes in deficit declined from £253.2bn to £221.4bn, while the surplus of schemes in surplus increased from £127.2bn to £142.6bn during the same period.

“The fall in the aggregate deficit during November, driven by a large uptick in asset values, is good news for pension schemes, but the larger picture remains more troubling,” said Buck head of retirement consulting, Vishal Makkar.

“DB schemes have taken a hammering this year and today’s figure is in stark contrast to December 2019, when the aggregate deficit of the schemes in the PPF 7800 Index was just £35.4bn.

“Even with the prospect of a coronavirus vaccine rollout just around the corner, the future looks tricky for the pool of eligible DB schemes covered by the PPF. For now, the major concern is that the recent high-profile high street collapses could trigger a domino effect, as large insolvent schemes entering the PPF put pressure on the fund and potentially force the PPF to increase its levies down the line. This in turn could place further stress on the remaining schemes paying levies into the fund.

“There are also more long-term problems brewing. The first year of this decade has proved exceptionally difficult for DB schemes and there seems to be very little respite on the horizon. Schemes still have to deal with an uncertain Brexit outcome, funding issues caused by low returns on bonds, the GMP equalisation process, and the possible challenges posed by the alignment of the RPI and CPIH in 2030. Hopefully though, the events of 2020 will prove to be a once in a lifetime event.”

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