At the moment, using realistic future investment returns, UK DB pension funds have never been better funded and have an aggregate surplus of around £358bn and an overall funding level of 133%.
The chart below shows the FAB Index plotted alongside the PPF 7800 Index, an index calculated by the Pension Protection Fund (“PPF”) to determine the aggregate level of Section 179 underfunding across all pension schemes in the UK eligible for PPF compensation in the event of employer insolvency.
As at 30 September 2016, the asset, liability, surplus/deficit and funding ratio of the PPF 7800 Index and the FAB Index were as follows:
Rob Hammond, Partner at First Actuarial said: "Historical low gilt yields have led to historical reported deficit levels of DB pension funds. But, a reduction in gilt yields doesn’t necessarily translate into an increase in pension fund deficits, particularly if that pension fund doesn’t invest solely in gilts.
“The FAB Index is an attempt to provide a more realistic measure of the value of pension fund liabilities in an attempt to combat what we see as scaremongering within the pension industry and to help trustees better understand the true value of DB pension fund liabilities.
“Whilst we recognise that pension funds should be funded prudently, we challenge the traditional ‘gilts plus’ approach to valuing DB pension funds. This starts from a position that arguably bears no relation to the likely long-term cost of paying the pensions. Instead we would encourage trustees to consider a ‘best-estimate minus’ approach so that they can start from the expected return on the assets they actually hold and deduct an explicit margin for prudence.”
The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension funds.
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