Each month the PPF updates its index which tracks the assets and liabilities of 7800 pension schemes in the UK.
The January update brought painful reading as the sharp decline in gilt yields in the last quarter of 2014 and first month of 2015 has seen liabilities balloon to £1.6trn (measured on the PPF funding basis, which differs to the basis many schemes will use for funding or investment decision making) and the deficit increasing to £370bn. Just 13 months earlier the deficit was just £30bn.
There is some interest rate hedging built into these numbers (around 25-30% according to the PPF’s annual purple book), but there is a lot of disparity behind this number. Some schemes have managed to get a significant amount of hedging in place and these schemes have typically seen their funding levels decline by only a couple of percentage points. Others with minimal hedging in place have experienced much more significant declines.
What we are starting to see now are these lower levels of gilt yields starting to become reflected in actuarial valuations and statements, and this is slowly creeping into the mainstream media – I’ve seen a few articles in the Times over the past few weeks picking up on one or two things.
What’s interesting if you stand back and look at the chart is the relative moves in the assets and liabilities. Despite the volatility in asset markets between 2007-2009 asset values have broadly marched higher at around 8% per annum over the last 5 years (this does include the effect of extra company contributions though of course not just investment returns). However liabilities have increased on average 15% per year since 2010, which has resulted in the liability value doubling over that period of time. The largest part of the variability of the overall deficit is also driven heavily by the liabilities, rather than the assets.