Schemes urged not to overreact as DB deficit rises £120bn in Q1 2020

The deficit of UK defined benefit (DB) pension schemes has increased by over £100bn since the start of the year, rising to £290bn at the end of March, according to the latest PwC Skyval Index.

The index noted however, that whilst this was a “significant increase” from the £170bn recorded at the start of the year, it had still not reached levels seen in late summer of 2019, having reached £340bn at the end of August 2019.

The deficit increased by £60bn over the last month, increasing from £230bn at the end of February 2020.

The firm emphasised that the first quarter of 2020 had shown the “inherent volatility in the measurement of pension funding”, urging trustees not to "overreact".

The firm noted that while the deficit has increased month on month, the drivers have been different.

It stated that lower yields were a key driver in January, pushing the liability measure up to £2trn, but high assets had offest some of the impact.

However, the "significant" fall in asset values seen since then have been another key driver, while an uptick in interest rates had offset the liability impact somewhat.

PwC chief actuary, Stephen Dicker, commented “Deficits have increased over the quarter but we’ve been here before; only around six months ago in fact. The key is not to overreact to short-term market movements - managing pensions requires a long-term view.

“Covid-19 is clearly a significant factor and throws up a range of things that those responsible for DB pensions need to manage including, most importantly, ensuring that payments keep flowing to the 10 million people currently receiving pensions.

“The Pensions Regulator (TPR) has demonstrated a pragmatic approach, opening up the possibility of stressed scheme sponsors deferring the contributions they are making to clear deficits for a period, to manage cashflow and help ensure they will be there to support schemes in the long-term."

Dicker added: "“For those who remain in a strong funding position, where they were well hedged and had significantly de-risked their assets, there may well be attractive options available to them, for example, in the insurance buyout market or in locking in hedging gains.”

PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.5,450 corporate DB pension funds.

The current Skyval Index figures are based on the 'gilts plus' method, widely used by scheme actuaries.

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