UK pension schemes' deficit rises to £223.9bn

The aggregate deficit of the 5,794 schemes in the PPF 7800 Index has increased to £223.9bn at the end of December 2016, from a deficit of £194.7bn at the end of November 2016. The funding ratio worsened from 88.1% at end November 2016 to 86.8%. Total assets were £1,476.4bn and total liabilities were £1,700.3bn. There were 4,339 schemes in deficit and 1,455 schemes in surplus.

Marathon on a treadmill

Commenting on the latest PPF 7800 Index figures, Andy Tunningley, head of UK strategic clients at BlackRock, said: “For UK pension schemes, 2016 was like a marathon on a treadmill. Energy was spent, pain incurred, but the finish line looked upsettingly similar to the starting post. The PPF 7800's aggregate funding ratio yo-yoed all year - at the mercy of wildly fluctuating bond yields - and ended back near where it started.  One step forward, one step backward was the story of pension fund deficits in 2016. The only schemes that avoided playing deficit hopscotch were those that had implemented LDI. 

“The latest update sees aggregate funding fall from 88.1% to 86.8% in December.  A familiar story: positive performance in equity markets was not enough to offset rising liability values given falling yields, and so overall funding levels worsened.  For all the recent talk of rising yields, in 2016 UK real rates fell around 100 basis points, and remain significantly below pre-Brexit levels. Looking ahead, we believe long-term structural forces will continue exerting downward pressure on real yields.

“As pension funds mature, the cost of making the wrong decision gets ever greater.  Good investment decisions are built from strong risk management. This is especially important now as the UK economy faces an uncertain future.  Pension schemes could be hit by the market pricing of liabilities and by the declining corporate health of their sponsors.  This is why we believe many schemes should be hedging more, and expect continued pension de-risking activity to drive appetite for UK LDI strategies in 2017.

“Risk management alone is not enough, however. Deficits exist and need to be clawed back. Liability sympathetic secure income assets, that produce cashflows at higher yields than corporate bonds or gilts, allow pension schemes to both control funding level volatility and outperform their liabilities. Though no silver bullets exist to eradicate the pensions problem, we believe many pension funds can make more of these assets to improve their outcomes.”

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