DB deficit grows during May
On the go: UK defined benefit funding levels dropped by four percentage points on aggregate at the end of May, according to the latest update from the Pension Protection Fund.
Final salary schemes had been sitting pretty after April's update, which revealed a 99.6 per cent funding level on the lifeboat's s179 basis, which measures the amount of money needed to buy out PPF benefits with an insurer (full buyout costs are typically much higher).
But the April deficit of £6.4bn grew to £69.9bn, reflecting an increase in liabilities to £1.73tn from £1.66tn. Asset growth was unable to match this movement, with the 5,450 schemes in the PPF universe holding £1.66tn.
Muted asset growth was the result of equity markets reacting negatively to US-China trade concerns. A bond rally offset this drop but also resulted in lower gilt yields across the curve, pushing liabilities higher. According to BlackRock, a 10-year yield of less than 1 per cent is the lowest since the EU referendum in 2016.
While funding levels suffered across the board, the UK DB universe continues to exhibit a split personality, with well-funded and matched schemes sheltered from the liability hit while worse-off schemes suffered.
Some 2,068 schemes were in surplus by an aggregate £129.2bn at the end of the month, compared with 3,382 schemes facing a £199.1bn hole.
Sion Cole, head of distribution for BlackRock's UK fiduciary management business, said: "These market moves serve as a reminder that unusually low levels of market volatility may not accurately reflect the risks in this late-cycle period."
He cautioned against chasing returns with a high-risk approach, saying: "We continue to see schemes approaching the endgame who haven’t thought about their strategy for the final few overs of the chase. A more gung-ho approach may be okay if you have a strong sponsor to back you; for most schemes, keeping a cool head may be more suitable."