The Pension Protection Fund is expecting some schemes to have a deterioration in funding due to the forced selling of assets in response to market turmoil, despite the overall improvement in the defined benefit sector, its chief finance officer and chief actuary has said.
Speaking at the launch webinar for the Purple Book 2022, hosted by Pensions Expert, Lisa McCrory revealed that the lifeboat fund is working with the Pensions Regulator to collect up-to-date figures from schemes, in order to get a full picture of the market turmoil impact on the DB sector.
Schemes raced to secure liquidity in September and October after the government’s doomed “mini” Budget, which was followed by a slump in government bond prices and a spike in yields. Schemes faced collateral calls from managers of their liability-driven investment strategies.
In November, the Work and Pensions Committee was told that around £500bn in assets were “missing” following the crisis, while the PPF itself warned that the true extent of the turmoil was still unknown.
We fully expect there has been some disruption to asset allocations on the back of the gilt turmoil in September
Lisa McCrory, Pensions Protection Fund
“We don’t have the data at the moment to be able say confidently” if scheme funding has worsened due to forced selling of assets, McCrory said.
“My expectation is certainly there will be some schemes that have had a deterioration in funding as a result,” she said.
“However, in aggregate, in terms of the entire universe and the risk we face, I think things are positive compared with where they were at the end of March.”
Schemes’ surplus jumps £146bn
The 17th edition of the PPF’s Purple Book, published on December 1, showed that DB schemes had a surplus of £193bn as of March 31 2022, which compares with £46.9bn for the year before.
The aggregate funding ratio increased to 113.1 per cent from 102.8 per cent in the previous year, while liabilities registered the largest-ever annual fall.
Total section 179 liabilities fell by almost 12 per cent and buyout liabilities dropped by nearly 10 per cent in the year to March 31 2022, according to the report.
Schemes in the universe have continued to invest a large proportion (72 per cent) of their assets in bonds. However, while the proportion of assets invested in equities remains stable (19 per cent), the proportion of assets invested in UK equities has slumped to a record low of below 10 per cent.
For the first time, there are now more DB schemes providing no form of accrual of benefits than those that do, with 51 per cent of schemes closed to new members and new benefit accrual.
McCrory noted that scheme funding has “improved materially” since March 31 2022, mainly driven by movements in the market, and in particular due to “the really significant increase in gilt yields that we have seen in the latter part of August and through September”.
As of October 31, the proportion of schemes in deficit had fallen by around a third to about 15 per cent of the universe, and the combined deficit was down to £5bn, she noted.
Schemes’ funding ratio has jumped from 113 per cent to 136 per cent, with “10 percentage points of that [increase] occurring in September alone, which was the same increase we had seen over the whole year before”, she explained.
Up-to-date data needed
However, McCrory stressed the need for caution in reading these numbers, since the PPF is using schemes’ asset allocations as at the end of March 2022.
“We fully expect there has been some disruption to asset allocations on the back of the gilt turmoil in September. We know some schemes may have reduced their hedge or had to sell some of their assets to meet collateral calls, and as a result the asset allocations may have moved,” she said.
TPR investment lead mulls role of ‘groupthink’ in LDI crisis
The Pensions Regulator’s lead investment consultant, Fred Berry, has suggested that industry “groupthink” may have played a part in creating the conditions for the liquidity crisis which engulfed defined benefit pension schemes in the autumn.
“It will be a little bit of time before that data feeds into our analysis, but our best estimate is that, overall, the net impact will be positive, although the impact for different schemes will vary.”
The PPF usually collects data from pension funds via their scheme returns, which contain date up to the end of March 2022, and is now “looking at other ways of getting out-of-cycle information”.
“We are working with TPR to get a better idea of that impact, in particular for some of the bigger schemes, which typically make up the bigger part of our claim forecasts,” McCrory added.
