PPF 7800 deficit falls by £13.9bn in September

The combined deficit of schemes in the PPF 7800 index fell by £13.9bn during September to £149bn, according to monthly figures released by the Pension Protection Fund (PPF).

As a result, the funding ratio for defined benefit schemes eligible for entry into the PPF increased from 91.5 per cent at the end of August 2019 to 92.2 per cent.

The total assets came in at £1,769.3bn while liabilities were £1,918.2bn, and there were 3,584 schemes in deficit and 1,866 schemes in surplus.

The deficit of the schemes in deficit at the end of September 2019 was £265.3bn, down from £273.5bn at the end of August 2019.

Although schemes are in a better position than last month - in August, the funding level of schemes fell by 3.5 per cent to 91.5 per cent – they are worse off than they were a year ago.

This is largely attributed to falling gilt yields, tightening fiscal policy and political uncertainty both in the UK and abroad.

Buck head of retirement consulting in the UK, Vishal Makkar, commented: “Despite the latest results from the PPF today showing that deficits have fallen, it’s clear that the fall in gilt yields to twenty-year lows has placed pressure on DB schemes.

“However, gilt yields are not the only factor fuelling deficits. A combination of political uncertainty in the UK, ongoing negotiations with the European Union and volatility in the global oil markets have added to continued instability in the wider market.

“The Chancellor’s recent statement about the future of RPI and the possible longer-term move to CPIH has added further uncertainty to funding discussions. Whilst some schemes will be prepared for this, for others it may be time to re-assess their contingency plans in order to tackle rising liabilities.”

“For example, trustees should consider their shorter-term investment strategy to help combat market volatility or even request further cash contributions from their company sponsor. However, in all cases, adopting the right approach will depend on the unique funding position of each scheme.”

BlackRock head of UK fiduciary business, Sion Cole, added: “After the shock results of the previous month, most schemes will have breathed a small sigh of relief in September. They will have cheered as the PPF 7800 index finished the month at 92.2 per cent, 0.7 per cent higher than August lows.

“Signs of progress in the trade wars in the first part of September created early momentum and a slew of good economic data drove the rolling maul of equity growth forward. September also saw a modest increase in bond yields effectively moving the try line of full funding ever so slightly closer as liabilities decreased.

“Looking back over the quarter as a whole however, that white line is as far away as ever. Global bond yields were driven lower by monetary policy easing, with most major central banks getting in on the act to help stimulate growth. The US Federal Reserve cut rates by 0.25 per cent in July and a further 0.25 per cent at their meeting in September.

“The European Central Bank announced its biggest package of rate cuts and economic stimulus in three years as it cut policy rate further into negative territory and revived its bond buying program for an unlimited period. China continues to inject fiscal stimulus through government spending to support growth.

"Bond markets are heavily pricing in continued monetary and fiscal easing, which leads to lower bond yields both now and in the future. This isn’t a good sign for pension schemes hoping that rising rates will help them get back on level terms.

“As always, we caution schemes against such a binary approach and advocate a good degree of interest rate hedging - this year a scheme with a duration of 20 years will have seen its liability value increase by around 15 per cent; LDI will have helped defend territory.”

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