UK Pensions Report Surplus Growth

(February 9, 2011) — Corporate pension surpluses covered by the Pension Protection Fund have doubled in January.

According to the PPF, which operates the safety net for members of pension schemes if these schemes collapse, pension funds eligible for its help had reported a surplus of £46.1 billion, from £21.7 billion in December.

After having been in deficit since May, January was the second consecutive month in which the pensions posted a surplus. According to the agency, the funding ratio improved from 102.3% to 105%. Total assets were £973.3 billion and total liabilities were £972.2 billion. It added that there were 3,696 schemes in deficit and 2,864 schemes in surplus.

The report said that the surplus was largely driven by rising gilt yields that offset stock market losses. “Scheme liabilities are sensitive to the yields available on a range of conventional and index linked gilts,” the report noted. “Liabilities are also time sensitive in that, even if gilt yields were unchanged, scheme liabilities would increase as the point of payment approaches…The value of scheme assets is affected by the change in prices of all the major asset classes, not just equity markets. Due to their weight in asset allocation and volatility, equities are usually the biggest driver behind changes in scheme assets.”

Despite the positive news for final-salary pension schemes that pay into the PPF, recent findings from Hymans Robertson’s “FTSE350 Pensions Indicator Report,” which examines the state of UK pension finances, has found that the regulatory focus on filling scheme deficits quickly is actually “unhelpful,” warning that sponsors should resist the pressure to rush to ‘plug the hole’ until they have a clear de-risking strategy in place.

“In our view, most schemes, and scheme sponsors, would benefit from a slower, more stable, approach to funding,” Clive Fortes, Head of Corporate Consulting at Hymans Robertson, stated in a release. “In this regard, the regulatory focus on speed of recovery is unhelpful and potentially damaging to businesses and to their pension schemes.”

Furthermore, according to the consultant firm, the continued improvement in the funding positions of FTSE350 schemes last year will increase the use of de-risking strategies in 2011. The report showed that scheme deficits fell significantly last year – from £142 billion at the start of the year to a £109 billion deficit at year end — largely a result of the switch from Retail Price Index to Consumer Price Index for scheme indexation, estimated to have cut deficits by £25 billion.