UK Pension Deficits Widen in May | Chief Investment Officer

After rising 2% in April, the funding level of the 5,588 pension plans in the Pension Protection Fund’s (PPF) 7800 Index slid to 94.5% from 95.1% in May, as the aggregate deficit increased to £94 billion ($125.7 billion) at the end of the month, from £81.7 billion ($109.3 billion) at the end of April.

Total assets for the plans were £1.61 trillion, representing a 2.1% increase for the month, and a 3.5% rise over the year. At the same time, total liabilities were £1.7 trillion, an increase of 2.8% over the month, and a decrease of 1.1% over the year. The PPF said the monthly rise in asset values reflected the impact of higher equity and bond prices.

Among the plans in the index, 65.5%, or 3,659 plans, were in deficit at the end of May, while 34.5%, or 1,929 plans, were in surplus. This is compared to 65.1%, or 3,637 plans in deficit, and 34.9%, or 1,951 in surplus, at the end of April. At the same time last year, 71.3%, or 3,986 plans, were in deficit, while only 28.7%, or 1,602 plans, were in surplus.

Although the plans’ aggregate deficit widened in May, it is still 44% lower than it was at the same time last year, when the deficit for the plans totaled £167.9 billion. The funding level is also more than 4% higher than the 90.3% recorded in May 2017.

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Among the plans that were in deficit, the aggregate deficit is estimated to have increased to £206.4 billion at the end of May, from £194.9 billion at the end of April. However, this is down 23% from the £252.1 billion reported at the end of May 2017. And among the plans in surplus, the aggregate surplus decreased less than 1% to £112.3 billion from £113.2 billion at the end of April, but was up 25% from the year-ago period when the surplus stood at £84.2 billion.

The PPF also reported that conventional 15-year gilt yields fell by 14 basis points in May, while index-linked five- to 15-year gilt yields fell by 11 basis points. Equity markets and gilt yields are the main drivers of funding levels, according to the PPF.

The UK’s FTSE350 pension gap continued to shrink, falling £16 billion ($21.4 billion) in May to £34 billion, according to consulting firm Mercer.

Mercer attributed the decline in accounting deficits of the UK’s 350 largest listed companies to rising asset prices combined with a slight drop in liabilities. Asset valuations increased £15 billion to £791 billion, while liabilities fell £1 billion to £825 billion, due to a fall in the expectation of inflation offset by lower corporate bond yields.

“This is great news for both pension schemes and company sponsors with yet another reduction in the pension gap, but we must not be complacent,” Alan Baker, chair of Mercer’s defined benefit policy group, said in a release. “Market swings could dramatically reverse these improvements and have done so in the past.”

Baker also said it’s important pension trustees and sponsors understand the risks they’re exposed to, and have the right strategies in place to lock in the recent gains. “It’s crucial to have contingency arrangements and plans in place.”

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Mercer’s data relates to about 50% of all UK pension liabilities, and analyzes pension deficits using the approach companies have to adopt for their corporate accounts. The firm estimates the aggregate combined funded ratio of plans operated by FTSE350 companies based on projections of their reported financial statements adjusted from each company’s financial year end in line with financial indices. This includes UK domestic funded and unfunded plans and all non-domestic plans.

The estimated aggregate value of pension plan assets of the FTSE350 companies at the end of 2017 was £785 billion, while estimated aggregate liabilities were £857 billion. Allowing for changes in financial markets through May 31, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £791 billion, compared with the estimated value of the aggregate liabilities of £825 billion.

“While this is more welcome news, recent market volatility sparked by the political situation in Italy serves as a timely reminder of the speed at which things can change,” said Le Roy van Zyl, a partner and strategy advisor at Mercer. “We increasingly see schemes having an action-focused risk and cost management plan. Such a plan will be clear on the conditions under which specific activities will be warranted, e.g., member options, insurance market solutions, and cashflow-matching asset strategies. Increased market uncertainty, as we are seeing at the moment, then feeds into this plan and consequently the sequence of activities.”