In the final update of the PPF’s index of UK pension funds to be published in 2015, data showed that asset and liability values are set to end 2015 close to where they started, in spite of considerable volatility seen during the year.
The overall funding level on the PPF basis was around 83% in November 2015, roughly the same level it was at in December 2014. However this masks quite some variation during the year with the funding ratio getting as low as 78% at the end of January. This compares to a high point of 120% back in 2007 and a recent high of close to 100% at the end of 2013.
The deficit at the end of November was c£250bn, which is down from the highs seen in January and February of 2015 of around 370bn, but still somewhat larger than it’s been during most of the last decade.
Overall 2015 has been a bit of a rollercoaster for UK pension funds with volatility on both the liability, and asset sides of the balance sheet (as I’ve mentioned before), but we end 2015 in a similar place to where we started.
Where does this leave pension schemes going into 2016?
Funding ratios are still low, the analysis above is based on the PPF’s liability basis, which is substantially lower than what most schemes would be aiming to get to over coming years. At Redington we estimate that on a “self-sufficiency” basis that many schemes use to guide their investment decision making, the liabilities would be around 30% higher, meaning the funding ratio would be closer to 64%. Pension schemes still require substantial contributions and investment returns over coming years to be fully funded.
What about risk?
The charts above clearly show that its been a rollercoaster ride for pension funds over recent years. The year-to-year variation in the funding ratio has been considerable, with funding ratios moving by as much as +/-10%, but could schemes have avoided this, or is it part-and-parcel of taking investment risk in the pursuit of returns?
In short the answer is that much of this volatility could have been avoided. A closer look at the cause of the volatility clearly shows that this has stemmed mainly from the liability side of the balance sheet, and with modern LDI techniques it is quite possible to eliminate most of all of this risk while still generating investment returns to fill the deficit.