Kate Smith, Head of Pensions at Aegon, said: “Unfortunately DB schemes look set to face another year in the spotlight with a string of high profile companies struggling to fund deficits while others pass their liabilities to the Pension Protection Fund. Today’s PPF 7800 Index which outlines the health of the nation’s DB schemes highlights a worsening in the funding position of these schemes with total liabilities increasing to £1700bn.
“We’re expecting to see the publication of a green paper from the government any day now which will hopefully encourage fresh thinking on how these schemes can be made more sustainable with ideas like an increased use of partial transfers and ensuring people have access to the advice and information they need about their pension hopefully on the table. It’s important to remember that the problems of DB affect pensions more broadly, with companies spending a disproportionate amount of time and money on shoring up these older schemes, potentially at the expense of the DC schemes designed to support the majority of younger workers.”
Andy Tunningley, Head of UK Strategic Clients at BlackRock, comments on the latest PPF 7800 Index figures: “For UK pension schemes, 2016 was like a marathon on a treadmill. Energy was spent, pain incurred, but the finish line looked upsettingly similar to the starting post. The PPF 7800's aggregate funding ratio yo-yoed all year - at the mercy of wildly fluctuating bond yields - and ended back near where it started. One step forward, one step backward was the story of pension fund deficits in 2016. The only schemes that avoided playing deficit hopscotch were those that had implemented LDI.
“The latest update sees aggregate funding fall from 88.1% to 86.8% in December. A familiar story: positive performance in equity markets was not enough to offset rising liability values given falling yields, and so overall funding levels worsened. For all the recent talk of rising yields, in 2016 UK real rates fell around 100 basis points, and remain significantly below pre-Brexit levels. Looking ahead, we believe long-term structural forces will continue exerting downward pressure on real yields.
“As pension funds mature, the cost of making the wrong decision gets ever greater. Good investment decisions are built from strong risk management. This is especially important now as the UK economy faces an uncertain future. Pension schemes could be hit by the market pricing of liabilities and by the declining corporate health of their sponsors. This is why we believe many schemes should be hedging more, and expect continued pension de-risking activity to drive appetite for UK LDI strategies in 2017.
“Risk management alone is not enough, however. Deficits exist and need to be clawed back. Liability sympathetic secure income assets, that produce cashflows at higher yields than corporate bonds or gilts, allow pension schemes to both control funding level volatility and outperform their liabilities. Though no silver bullets exist to eradicate the pensions problem, we believe many pension funds can make more of these assets to improve their outcomes.”
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