Vishal Makkar, Head of Retirement Consulting at Buck in the UK comments: “There was a slight increase in the aggregate deficit during December, ending what has been a rocky period for DB schemes. Despite the ongoing rollout of several coronavirus vaccines, the UK is experiencing surging Covid-19 cases which, along with the prospect of a prolonged lockdown, means 2021 looks set to be another challenging year for DB schemes as businesses continue to suffer. The major concern is that another devastating year could threaten the strength of employer covenants, especially in heavily affected sectors such as retail and travel. This will bring into focus the need for a good risk monitoring framework looking at the sponsor covenant alongside investment risk and funding.
“In addition to the virus, December was dominated by concerns about the prospect of a no-deal Brexit. The eleventh-hour trade deal between the UK and EU on Christmas Eve has provided some much-needed clarity, resulting in the FTSE 100 surging to levels last seen in March. However, this may well be a short-term bump. It is still uncertain what effect Brexit will have on UK companies in the long run, but the disruption to trade and supply lines that the UK has already begun to experience is not an auspicious start.”
Sion Cole, Head of UK Fiduciary Business at BlackRock, said: Funding levels fell slightly in the last month of 2020, with the PPF 7800 Index ending the year at 95.5%, down 0.3% from November. This was a result of liabilities increasing due to falling gilt yields, with 10 year yields ending the year at 0.25% (down 0.13% in November) and 30 year yields at 0.78% (down 0.11%). While inflation expectations fell, investors remained nervous around the Brexit deal going down to the wire and the emergence of a new strain of the COVID-19 virus prompting tougher restrictions for large portions of the UK.
“In spite of this uncertain backdrop, growth assets had a strong month, driven by positive news of global vaccine roll-outs and the announcement of another fiscal stimulus package in the US. Global equities rallied by 2.3% in Sterling terms. In the UK we saw an upturn, with the FTSE All Share gaining 3.9%. Growth stocks continue to outperform value stocks, following the trend of much of the last few years. However, this was not enough to offset the growth in liabilities over the month.
“This draws to a close a challenging year for UK Pension Schemes, with the PPF 7800 Index, ending the year 1.9% lower. Aggregate deficits have increased by £75.5bn to end 2020 at £86.4bn, despite assets rising £134.1bn and the S&P500 US equity index hitting all-time highs 3 times over the year. Indeed, the latest Purple Book shows that 2/3 of DB Schemes are now in deficit, vs. 56% the previous year, following the COVID-19 market crash, and the continuing economic shutdown means that sponsor covenants continue to come under pressure in the hardest hit industries. However any schemes with high liability hedge ratios and a flexible, dynamic growth portfolio will have fared better. Once again the spotlight is on fiduciary management where schemes in these arrangements should have seen funding level increases. As markets will likely remain volatile in 2021 and governance requirements for trustees continue to increase, we would expect many more trustees to consider delegating the management of their investment strategy to a professional partner.”
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