UK final salary pension scheme funding drops below 100% in December

The aggregate funding level for UK final salary pension schemes in the corporate sector dropped from 101% to 98% in December, as measured by the Pension Protection Fund’s 7800 index.

Commenting on the drop, Aviva Investors investment strategist, global investment solution, Boris Mikhailov, commented: “There was not much to celebrate for pension schemes in December. With the sell-off in risk assets and investors fleeing to the safety of government bonds, the aggregate PPF funding level dropped from 101% to 98% as equity markets fell and gilt prices shot up.”

However, Mikhailov said that most pension schemes are going into 2019 with stronger funding positions compared to the beginning of 2018, when the aggregate funding level was 94%. In addition, he said that there are now opportunities for pension funds in some high quality, income-generating assets. “Spreads on A-rated public credit have widened over the year, from around 1% p.a. to 1.8% p.a. over comparable Gilts. This could present an opportunity to consider how existing investment strategies could be reshaped to take advantage,” Mikhailov said.

Mikhailov said that pension funds could have scope to move to a cash flow-driven investing (CDI) strategy, where assets are invested in high quality, investment grade assets to produce predictable and secure cash flows to match liability payments. “The CDI approach leads to more certainty of both compared to the barbell approach of growth and matching assets. The wider the spreads are on CDI assets, the sooner a pension scheme could move to that approach.”