PPF Shows UK Schemes Are in a Deteriorating State

(August 9, 2011) — Pension Protection Fund (PPF) aggregate deficits rose in July as market turmoil pummeled investments.

Aggregate deficits of schemes monitored by the PPF — which operates the safety net for members of pension schemes if these schemes collapse — increased to £67.3 billion ($109 billion) from £8.3 billion at the end of June. The funding ratio for the 6,533 schemes in the PPF 7800 Index dropped from 99.2% to 93.7%.

The fund stated: “The FTSE All-Share Index fell by 2.3% over July and 15-year gilt yields were down 42 basis points. During the month of July there was a 0.26% decrease in assets mainly due to declining UK and global equities, with some offset from higher bond prices. Liabilities also rose, by 5.6%, due primarily to the significant fall in gilt yields.”

Meanwhile, the PPF said there were 4,684 schemes in deficit and 1,849 schemes in surplus at the end of last month, with the deficit greater than the £10.5 billion recorded a year earlier.

In June, new research conducted in the United Kingdom revealed that the majority of pension schemes in the UK are structurally underhedged. The research showed that 85% of pension schemes have less than 50% inflation-linked assets matching their liabilities. The proportion of matching assets relative to liabilities in these schemes was between 25% and 35%.

Jay Shah, the co-head of business origination for the Pension Insurance Corporation, cautioned, “Pension schemes are continuing to take big risks of inflation eroding away investment returns and funding positions deteriorating.”