DB schemes move into surplus

The 5,450 UK DB schemes measured by the PPF had an aggregate surplus of £14.3bn at the end of November on a section 179 basis.

This compares to a deficit of £67.2bn at the end of October 2018. The difference was largely due to updated funding assumptions.

This month, the PPF made two changes to the way the PPF 7800 Index is calculated. The November 2018 PPF 7800 Index moves onto the latest ‘A9’ s179 valuation assumptions set, introduced with effect from November 1 2018, and uses the underlying data from the Purple Book 2018 for the calculation of funding levels, reflecting the latest data available.

The PPF’s calculations show the combined effect of these changes has caused the funding level of the DB scheme universe to increase by 7.3 percentage points to 100.9 per cent at the end of November 2018, compared with 93.6 per cent reported at the end of October.

An increase of 5.1 percentage points was due to the new version (A9) of the actuarial assumptions for s179 valuations, and an increase of 2.3 percentage points due to moving to the new Purple Book 2018 dataset.

There was a further decrease of 0.1 percentage points because of market movements over the month of November – an overall increase in gilt yields led to decreases in liability values of 0.3 per cent and assets of 0.5 per cent, the latter including a slight offset for an increase in overseas equity prices.

DB pensions are not out of the woods yet with 3,008 schemes remaining in deficit, with a combined deficit of £137.6bn.

As well as acknowledging the updated funding assumptions, which were the most significant cause of the change, Andy Tunningley, head of UK Strategic Clients at BlackRock, commented on the financial background: “Equity market volatility experienced in October continued throughout November although less significantly, with the FTSE All Share Index ending the month down 1.6%. Schemes with more global exposure were saved somewhat by positive overseas equity performance."

However, most equity markets remain in negative territory for the year, something that has tempered funding level increases, despite the 2018 Purple Book suggesting UK DB schemes’ equity allocations have fallen to new lows, he added.

Tunningley said: “Longer-dated bonds fell in value over November and are down year-to-date, and it appears we will see both equities and bonds fall over the calendar year for only the second time in 30 years. Never has the case for alternative assets been more relevant, to boost returns through the illiquidity premium and diversify exposures, but still schemes have less than 10% allocated to these assets according to the 2018 Purple Book.”

He concluded: “Above all our message to trustees is clear: know what’s in your LDI and bond portfolios, build resilience into your strategy and diversify your growth assets to ensure your scheme is in good shape for whatever 2019 throws at it.”