On the go: The position of the UK’s 5,318 defined benefit pension schemes moved into surplus for the first time in two years, with improvements in funding positions driven by increased bond yields, according to the PPF 7800 index for February.
The aggregate surplus was estimated to have increased to £14.6bn at the end of February from a deficit of £65bn at end-January, while the funding ratio rose from 96.5 per cent to 100.8 per cent over the same period.
However, assets were down £60bn to £1.74tn, while liabilities stood at £1,72tn.
Schemes in deficit saw their shortfall reduce by £58bn, from January’s £212.4bn to £154.4bn at the end of February, and the split between schemes in deficit and those in surplus was 2,839 and 2,479, respectively.
Commenting on the figures, Sion Cole, head of UK fiduciary business at BlackRock, said the moves were “driven by long-dated gilt yields rising sharply in the last week of the month, finishing up around 0.5 per cent, which meant [Pension Protection Fund] liabilities fell by 8 per cent”.
“This has turned the £65bn deficit into a £15bn surplus on the PPF basis, but we would exercise caution that pension schemes are now ‘out of the woods’,” he said.
“The speed of yield rises over the past few weeks shows just how volatile liability values can be. We would advocate taking advantage of any funding level gains and taking the opportunity to increase hedging levels to protect from future volatility.”
Vishal Makkar, head of retirement consulting at Buck, pointed to the impact of the roadmap for the post-pandemic recovery, as well as the chancellor’s budget earlier this month.
“The clear timeline for the UK’s reopening, combined with the ongoing success of the vaccine rollout, has provided a light at the end of the tunnel and this will be a particular relief for heavily affected sectors, such as hospitality, retail and travel,” Makkar said.
“February was also dominated by speculation around the chancellor’s Budget. The extension of the furlough scheme and the introduction of further government support, which were announced at the start of March, will hopefully prevent any surge in unemployment or large-scale company collapses for the time being.”
While this is good news in the short term, Makkar warned: “The chancellor has made it clear that this support will not be available forever, and the major concern remains that furloughed workers could reach a cliff edge once government support ends.”
Cole likewise highlighted the developing pandemic situation. He said: “Given the continuing uncertainty, trustees will need to tread carefully and fully assess the risks.
“Constructing resilient, diversified and nimble portfolios — and in many cases delegating this responsibility — will help their schemes leave the proverbial woods in good shape.”
