PPF 7800 Index: Surplus down £2bn as yield rise fails to offset dip in asset values

The funding ration of the PPF 7800 index, which includes defined benefit (DB) pension schemes potentially eligible for entry to the PPF, fell from 146.4 per cent to 146.2 per cent between the end of July and the end of August, with the number of schemes in surplus falling from 4,673 to 4,658.

The total assets of eligible defined benefit schemes on a section 179 basis listed in the PPF 700 Index were £1,396.6bn, and total liabilities were £955.5bn. There were 473  schemes in deficit, a rise of 15 on the previous month.

A scheme’s section 179 liabilities represent the premium that would have to be paid to an insurance company to take on the payment of PPF levels of compensation – although this compensation may be lower than full scheme benefits. 

Scheme asset values fall

The schemes in deficit at the end of August 2023 were £2.3bn, up from £2.2bn at the end of July 2023.               

Shalin Bhagwan, chief actuary PPF, said aggregate funding levels across the DB universe deteriorated slightly in the past month due to a reduction in the value of pension scheme assets.

He added: “This was offset to some extent by a reduction in liabilities arising from a rise in yields. During the month, yields on long-dated gilts briefly reached levels seen during last year’s market turmoil. This time, markets remained orderly and the spike in yields quickly reversed."

Bhagwan said anecdotal evidence suggested that some pension schemes took the opportunity to add to their gilt holdings but in aggregate, funding level gains of the past 12 to 18 months haven’t been accompanied by the same level of interest rate and inflation hedging activity as similar gains would have prompted in the past.

“This is perhaps unsurprising as pension schemes seek to review their funding, investment and governance arrangements following the stress in the leveraged (liability driven investment) LDI market.

 “While the estimated aggregate funding position continues to show a surplus, it should be noted that about 10 per cent of DB pension funds are in deficit and some of these may not be able to rely on their sponsor covenant.”

De-risking market

Jaime Norman, senior actuarial director at consultancy Broadstone, said: “The small declines in the aggregate surplus and funding ratio must be seen in the context of huge improvements to funding over the past two years.

 “Pension schemes are in a significantly stronger position now, which has led to the intensely competitive de-risking market as schemes look to capitalise by securing the benefits of their members via a buyout. Insurers are scaling capacity to meet demand, but schemes need to ensure they are putting themselves in the strongest possible position to attract and engage the attention of insurers.”

“Excellent preparation and data quality – as well as best-in-class governance and administration – will be vital to gaining traction in the current market, particularly for schemes at the smaller end of the market.

 “Yesterday, the PPF announced it hopes to reduce the levy from £200m to £100m. It will be a source of frustration that legislative constraints prevent the PPF from reducing the levy further given its data continues to prove the improved funding environment.”

Uptick in BPA activity

Kieran Mistry, senior business development manager at Standard Life, part of Phoenix Group, said the PPF’s latest update showed how many DB schemes will have achieved or be close to full funding levels.

He said: “As rates continue their steady rise, funding levels remain markedly improved from this time last year, with many schemes now focused on locking down risk and improving member benefit security.

 “It is anticipated to be a record-breaking period for bulk purchase annuity (BPA) activity, with a strong finish to the year and no end in sight as we start to look to early 2024. As ever, trustees and sponsors looking to de-risk should focus on preparation as a key priority. We’re also seeing flexibility becoming increasingly critical for schemes looking to navigate a constantly evolving market.”