Deficit of UK Defined Benefit Plans Balloons in May

The aggregate deficit of the 5,450 plans in the UK’s Pension Protection Fund’s PPF 7800 Index ballooned more than tenfold to an estimated £69.9 billion ($88.7 billion) at the end of May, from £6.4 billion at the end of April. The deficit is also more than £16 billion larger than it was at the same time last year when it was £53.8 billion.

As the plans’ deficits widened, their funding level decreased to 96% at the end of May, from 99.6% at the end of April, and compared with 96.8% at the end of May 2018.

Total assets for the plans rose 0.8% to £1.66 trillion at the end of May from the end of April and were 3% higher than at the same time last year. Meanwhile, total liabilities increased 4.6% during May to £1.73 trillion, which was an increase of 3.9% over the year.

The number of plans that were in deficit at the end of May increased to 3,382 from 3,089 at the end of April, representing 62.1% of the total defined benefit plans tracked by the index. This was also up from 3,333 at the end of May 2018.

At the same time, the number of plans in surplus fell to 2,068 at the end of May (37.9%) from 2,361 at the end of April (43.3%), and 2,117 at the end of May 2018 (38.8%).

The aggregate deficit among the plans in deficit at the end of May is estimated to have increased to £199.1 billion from £157.2 billion at the end of April, and from £179.5 billion at the end of May 2018. Meanwhile, the total surplus of the plans in surplus decreased to £129.2 billion from £150.8 billion at the end of April, but was higher than the surplus of £125.7 billion reported during the year-ago month.

According to the Pension Protection Fund, equity markets and gilt yields are the main drivers of funding levels as liabilities are sensitive to the yields available on a range of conventional and index-linked gilts. It also said that while the value of plan assets is affected by the change in prices of all asset classes, equities and bonds are the biggest drivers behind changes—bonds have a higher weight in asset allocation, but equities tend to be more volatile.

Equities fell during the month as the FTSE All-Share index declined 3% in May, and was down 3.2% for the year. Gilt yields also fell in May as the five- to 15-year index-linked gilt yields fell 19 basis points in May and were down 53 basis points over the year. And the 10-year, 15-year, and 20-year fixed interest gilt yields were down 28, 25, and 23 basis points, respectively, during the month, and were down 38, 33, and 28 basis points, respectively, for the year.