UK pension funding never more “perilous state” than now

UK pension schemes are in their worst funding position when measured by the Pension Protection Fund (PPF) 7800 index – and the Brexit vote is the cause.

Record low gilt yields have pushed deficits to an all time high, commentators noted.

David Curtis, head of UK institutional business at Goldman Sachs Asset Management told Funds Europe a startling statistic. For every 0.3% decrease in gilt yields, liabilities rise by 6%. However, if assets rise 1.5% as gilt yields fall, this only reduced the net rise in liabilities to about 4.5%.

However, despite the dire state of pension schemes at the moment, Curtis thinks it’s important to look at the PPF 7800 over its lifetime. There have been periods when schemes have been in surplus, the most recent being in 2010.

“There have been at least three times since the index was published when we had times of fairly significant surplus for a reasonable period of time,” said Curtis.

Curtis also mentioned that the assets within the index have risen significantly since its inception in 2008 – but the problem is that liabilities have risen at greater rate. One major contributing factor to this is that long-term interest rates, such as 30-year gilt yields, are at their all-time low.

The solution, according to Curtis, is to understand where the risks are in portfolios and making sure schemes are adequately compensated for them and, where risks are unrewarded, reducing them.

“The investment strategy has to be diversified and resilient as well as being able to perform well in all market conditions,” said Curtis.

Andy Tunningley, head of UK strategic clients at BlackRock also said that a significant slowdown in UK growth and material likelihood of a recession next year could threaten the financial outlook of pension scheme sponsors.

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