Rising bond yields have led to the biggest ever improvement in the fortunes of the UK’s pension schemes and also aided by a sharp fall in the liabilities, which move in the opposite direction to interest rates. The Pension Protection Fund, the industry funded insurance body that acts as a safety net when employers become insolvent, said the value of liabilities fell by more than £ 71 billion in May, while the aggregate value of assets was unchanged.
Rising bond yields have led to the biggest ever improvement in the fortunes of the UK’s pension schemes and also aided by a sharp fall in the liabilities, which move in the opposite direction to interest rates. The Pension Protection Fund, the industry funded insurance body that acts as a safety net when employers become insolvent, said the value of liabilities fell by more than £ 71 billion in May, while the aggregate value of assets was unchanged.
Joanne Shepard, a senior consultant at Actuaries Towers Watson a risk management and human resource consulting service provider, said “In cash terms, the £ 71 billion fall in the aggregate deficit is the biggest month-on-month improvement in the aggregate funding position since these numbers were first calculated in 2005, this happened primarily because the interest rate on government bonds increased sharply in May and the PPF’s measure of liabilities is very sensitive to this”.
The aggregate shortfall at the end of May totaled £ 185.5 billion, down from £ 256.6 billion a month earlier. The PPF noted that rising bond yields had the effect of depressing their market value, but this was offset by the rising value of equities held by schemes. The PPF was facing its biggest ever shortfall last year as bond yields plummeted. UK pension schemes in recent years have been raising their exposure to bonds, an asset class should generate a rise in value in tandem with their liabilities. Many schemes have however retained significant exposure to equities with employers hoping to be able to cut cash contributions from it, if these produce double digit returns as they did in the bull markets in the 1980’s and 1990’s. The PPF announcement has underscored the fact that changes in liabilities have a far bigger impact than changes in asset prices. The PPF explained the methodology on how it tracks the month to month changes; it said a 7.5 rise in equity markets would boost aggregate asset values by 2.7 percent. But a 0.3 percentage point rise in gilt yields would reduce liabilities by 5.9 percent. That is somewhat offset by a 1.4 percent decline in the market value of bonds held by the average scheme, but in the context of rising stock markets and interest rates, pension schemes on balance, are better off and positive news to the pensioners who are hit with low state pensions.
http://www.internationalfinancemagazine.com/article/index/UK-Pension-Fund-Rises.html