UK DB pension funding position remains 'relatively stable' despite deficit increase

The aggregate deficit of UK defined benefit (DB) pension schemes increased to £86.4bn at the end of December 2020, according to the Pension Protection Fund (PPF) 7800 Index.

However, despite the £7.6bn increase since November, PPF chief financial officer and chief actuary, Lisa McCrory, emphasised that the funding ratio remained "relatively stable" during December, with a slight fall from 95.8 per cent to 95.5 per cent recorded.

“2020 was an extremely challenging year as the Covid crisis impacted market movements, and further challenges are expected in 2021," she added.

Indeed, the index showed that whilst total scheme assets increased by 1.9 per cent over the month to £1,834.1bn, equal to a 7.9 per cent increase over the year, total liabilities had seen a 2.3 per cent increase during December to £1,920.5bn, marking 12.3 per cent growth over the past year.

Furthermore, it revealed that whilst the number of schemes in deficit decreased from 3,216 to 3,206, the combined deficit for this subset had increased to £230.3bn as of December 2020.

The surplus for schemes in surplus however, also increased during this period, rising from £142.6bn in November to £143.9bn as of the end of December 2020.

Commenting on the latest findings, Buck head of retirement consulting, Vishal Makkar, highlighted the "slight increase" in the deficit as marking the end of a "rocky period" for DB schemes.

However, he also emphasised that despite the ongoing rollout of several coronavirus vaccines, the UK is experiencing surging Covid-19 cases which, combined with Covid-19 restrictions and lockdowns, could mean "another challenging year" for DB schemes.

He explained: “The major concern is that another devastating year could threaten the strength of employer covenants, especially in heavily affected sectors such as retail and travel.

“This will bring into focus the need for a good risk monitoring framework looking at the sponsor covenant alongside investment risk and funding."

In addition to this, Makkar noted that the "eleventh-hour" Brexit trade deal on Christmas Eve had provided much-needed clarity to the markets, with the FTSE 100 surging to levels last seen in March as a result.

“However, this may well be a short-term bump," he warned. "It is still uncertain what effect Brexit will have on UK companies in the long run, but the disruption to trade and supply lines that the UK has already begun to experience is not an auspicious start.”

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