By Kerrin Rosenberg, CEO of Cardano UK
So the PPF published an index called the PPF 7800. It’s an index that was originally made up of 7800 UK pension funds and it tracked their funding ratio and deficit as far as the PPF measure was concerned. Today because many of those pension funds have either wound down or moved into the PPF itself, the index contains almost 5500 funds. It’s still a fairly accurate barometer of the health of the UK financial system and it is useful to take a look at what it is telling us.
So back in August of 2008, just before the GFC hit, the PPF index showed an overall deficit of about £30 billion and UK pension funds had a funding ratio on that measure of 95%. Six months later, well into the depths of the GFC, that deficit had risen to £200 billion and funding ratios had plummeted to 78%. Now as we all recall in 2009, there were extraordinary measures; quantitative easing was introduced for the first time and central banks slashed interest rates and injected a huge amount of liquidity into the system which caused a massive rally in financial assets and at the end of 2009 the PPF 7800 index had eliminated its deficit and pension funds were back to 100% funded on that basis.
If we just fast forward to 2020, at the beginning of this year, on the first of January the index showed that the aggregate deficit was about £10 billion and the funding ratio on that basis was 99%. At the end of February, the PPF estimate that the deficit had risen to £125 billion and funding ratios had fallen to 93%. Now, clearly, the March figures aren’t out yet, but at a very rough estimate, I think we believe the deficit will have doubled and will probably be standing at £250 billion and the funding ratios in the mid 80%. And so, in a very short space of less than 8 weeks, the PPF deficit has risen by more than it was in the 2008 crisis. Now that’s not completely comparing apples with apples because of course in 2008 pension funds in aggregate had £700 or £800 billion worth of assets whereas at the beginning of this year that same figure was over 1.7 trillion. So it is a much larger industry; there’s been a lot of capital that has been injected into it. But the scale of depreciation that we experienced in 2008 is probably being witnessed on a similar level at the moment.
The impact of funding ratios is not the only thing that will effect pension funds. It will frustrate journey plans. You will recall that in 2017 the government published a green paper, which later became a white paper, and this formed the basis of the current funding consultation that is taking place with the pensions regulator. In that analysis, a very important part of the analysis was evaluating the health and resilience of the DB sector. The government, based on analysis and research undertaken by the Pensions Regulator and the PPF concluded, only 5% of the industry was seriously at risk of defaulting. And they thought that in only 5% of their simulations that claims on the PPF would rise to £15 billion or more. And so the government concluded several years ago that the industry was in relatively safe shape, robust shape, that it could weather the storm, that industry was able to support the pension commitments and therefore that a material change in the funding regime was not required. Now that formed the basis for the current new funding regime that the TPR is in the process of consulting on. Now, all of that analysis, I am afraid, is going to be, severely tested in the coming weeks. Whereas in 2008 we had a financial crisis, where people were being laid off because many of the financial institutions they worked for were experiencing credit losses and were running out of business, today, of course, the situation is dramatically different. Willing workers have been told to, required to, stay at home for their own safety to stop the spread of the virus. So the measures that were very effective in 2009 to cure the credit losses, which involved pumping liquidity into the financial system and stimulating financial assets are not going to be the same medicine that we need today.
We need money in peoples pockets, we need workers and consumers to continue buying to keep demand up. That requires a different form of response, and it remains to be seen, as to whether we can see the same sort of bouncebacks and the same sorts of stimulative action that can create measures. At the same time, the level of the stress in the corporate sector is much wider today than it was in 2008. In 2008, trouble was contained largely to the financial sector and to organisations that had overstretched themselves in terms of their borrowing. Today, there are large sections of the economy that are suffering nothing to do with debt, anything in the travel and leisure sector for example, but energy has hugely been impacted by the collapse in oil prices. And so the level of corporate distress and the ability of the sponsor to support the pension fund is going to be called into question in many many more sectors.
And so we stand today, in March, probably at deficits of over £250 billion having grown by over 200 billion in the past 8-9 weeks.
For sure the PPF is in a better shape. In 2008 it was much smaller, today the PPF has over £30 billion of assets and has surplus of over £6 billion meaning that it can absorb pension funds with £6 billion worth of deficit before the PPF itself falls into deficit.
How many defaults we’re likely to see, how many organisations are unable to survive the current crisis and would be forced to wind up and put their pension funds into the PPF still remains to be seen. Let’s hope that policy makers and central banks around the world find effective tools to counteract the economic impacts of the effect of Coronavirus in 2020.
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