Out-Law News 2 min. read
12 Jun 2013, 4:05 pm
The monthly PPF 7800 Index (7-page / 220KB PDF), produced by the Pension Protection Fund (PPF), recorded a £71.1 billion reduction in combined deficits of the 6,316 DB schemes tracked by the PPF between the end of April and the end of May. The number of schemes recording a deficit also decreased, to 4,885 or 77.3% of the 6,316 schemes tracked by the PPF.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the figures showed "just how sensitive" pensions scheme deficits were to relatively small changes in bond yields.
"Pension scheme valuations can fluctuate, even where the level of assets remains flat," he said.
"Deficit reductions are critical for businesses with DB schemes. They should eventually translate into lower pension contributions, freeing up cash that businesses can then invest in growth. But for that growth to be possible more substantive, long-term improvements are required," he said.
The PPF pays compensation to members of DB schemes, which are schemes that promise a set level of benefits regardless of the performance of the underlying investment, if their employers go insolvent. Its monthly PPF 7800 Index is based on the combined section 179 liabilities of the DB schemes potentially eligible for entry to the PPF. This refers to the liabilities schemes have under section 179 of the Pensions Act 2004, broadly representing the premium that the scheme would have to pay to an insurance company to cover a payout that matches the level of compensation its members are entitled to receive from the PPF.
According to the report, the aggregate deficit of the tracked DB schemes decreased from £256.6bn at the end of April to £185.5bn at the end of May. In comparison, a deficit of £317bn was recorded at the end of May 2012, the PPF said. Schemes held a total of £1,129.9bn in assets at the end of the month against total liabilities of £1,315.4bn; a funding ratio of 85.9%, up from the 81.5% funding ratio recorded at the end of April and considerably higher than the 76.4% recorded in May 2012.
Total DB scheme assets remained "broadly unchanged" over the month, the PPF said, with rising equity market values cancelled out by falling bond prices. Higher yields from index-linked gilts, or Government bonds, resulted in a 5.2% reduction in scheme liabilities over the same period.
Pension scheme deficits soared to record highs last year as a result of falling gilt yields, driven down by the Bank of England's quantitative easing policy. Yields affect a formula known as the 'discount rate', which is used by a pension scheme actuary to calculate the cost of providing all the benefits currently promised under the scheme during its regular valuations. The result of this formula can create the appearance of a deficit, which the scheme's sponsoring employer is legally obliged to fill.
