A majority of UK defined benefit schemes continue to see an improvement in their coverage ratio with a surge in equity markets and rising gilt yields. The coverage ratio (assets divided by liabilities) of schemes in the PPF 7800 Index increased from 79% in June to 83% in July. Higher gilt rates contributed to a decrease in liabilities of 1.9% during the month, while there was a 3.8% increase in assets due to a rise in UK and global equities.

Over the past year, falling equity prices and bond yields have led to an overall worsening of the coverage ratio of schemes in the sample universe. Ten-year gilt yields are still down 1% from a year ago, contributing to a 9.7% increase in aggregate liabilities, according to the Pension Protection Fund (PPF). The aggregate funding position (assets minus liabilities) of the pension funds in the sample universe also improved during the month from a deficit of £215bn at the end of June to £158bn at the end of July. Yet scheme funding is clearly worse compared to July 2008 when the aggregate deficit stood at £18bn, notes the PPF. The total number of schemes in deficit in July is estimated to have improved to 6,265, which is 196 schemes fewer than in June, representing 85% of defined benefit schemes in the sample. The number of schemes in surplus increased to 1,116 from 920 during the month.

source: ppf august 2009

source: ppf august 2009

Year to date, the coverage ratio has fluctuated between a low of 76% (March) and 83%. The charts above demonstrate the volatility of pension fund deficits during the last five years. PPF figures are transformed to an s179 valuation basis using changes in market indices for principal asset classes and the fixed interest and index-linked gilts yields to value liabilities. The PPF 7800 sample universe actually covers only 7,381 schemes. The fall in the number of eligible schemes from 7,744 a year ago reflects a number of factors such as mergers and schemes buying out benefits with an insurance company. A number of rules of thumb are used to measure changes in asset prices on an s179 basis: a 7.5% rise in equity markets increases assets by 4% while a 3bp rise in gilt yields reduces scheme assets by 1% and shrinks liabilities by 6%.

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