Vishal Makkar, Head of Retirement Consulting at Buck in the UK comments: “The fall in the aggregate deficit during November, driven by a large uptick in asset values, is good news for pension schemes, but the larger picture remains more troubling. Defined benefit (DB) schemes have taken a hammering this year and today’s figure is in stark contrast to December 2019, when the aggregate deficit of the schemes in the PPF 7800 Index was just £35.4 billion.
“Even with the prospect of a coronavirus vaccine rollout just around the corner, the future looks tricky for the pool of eligible DB schemes covered by the PPF. For now, the major concern is that the recent high-profile high street collapses could trigger a domino effect, as large insolvent schemes entering the PPF put pressure on the Fund and potentially force the PPF to increase its levies down the line. This in turn could place further stress on the remaining schemes paying levies into the Fund.
“There are also more long-term problems brewing. The first year of this decade has proved exceptionally difficult for DB schemes and there seems to be very little respite on the horizon. Schemes still have to deal with an uncertain Brexit outcome, funding issues caused by low returns on bonds, the GMP equalisation process, and the possible challenges posed by the alignment of the RPI and CPIH in 2030. Hopefully though, the events of 2020 will prove to be a once in a lifetime event.”
Sion Cole, Head of UK Fiduciary Business at BlackRock, said: “November was a welcome relief for UK Pension Schemes with the PPF 7800 index increasing by 2.5% to finish the month at 95.8%. Funding levels were driven largely by a positive month for growth assets, as the announcement of three vaccines for COVID-19 led to a much-awaited shift in market sentiment.
“This sign that there is an end to the Covid-19 pandemic in sight led to positive performance across global markets. Indeed, global developed market equities increased nearly 13%, its biggest monthly gain in 45 years and the second-largest on record. Additionally, a Democrat win in the US election brought more certainty to US markets which saw the S&P 500 gain 11%. The month also saw a cyclical rotation, with previously underperforming sectors outperforming on the expectation of more fiscal stimulus in the US. In fixed income, it was the riskier high yield and emerging markets that outperformed as we moved into a more supportive environment for these types of assets.
“Pension schemes were also helped further by a slight fall in liability values, resulting from slightly higher yields and marginally lower inflation expectations. However, as interest rates are not likely to rise significantly in the near future, we would continue to encourage Trustees to ensure that they are well-hedged, instead using their risk budget to diversify into alternative assets or other growth assets which can help lead to a smoother funding journey.
“As we head into 2021, uncertainty still remains. Not only with regards to the equality and pace of global recovery from the COVID-19 crisis, but also with Brexit discussions still ongoing with no clear sight of a deal at present. As a result, we advocate a well-diversified portfolio which looks beyond traditional asset class labels to ensure there are no overlapping exposures across certain regions or asset classes. Additionally, the rotation in markets this month has shown how dynamic schemes need to be ensure funding levels continue to improve after the impact of Q1. Delegating the management of investment strategies to a fiduciary manager can help with both of these aspects and we expect to see a continued increased interest in the market as a result.”
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