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Rising gilt yields drive down PPF deficit levels

Rising gilt yields drive down PPF deficit levels

Mona Dohle
Wednesday 9th May 2018

Deficit levels for the Pension Protection Fund (PPF), the lifeboat for UK pension funds, have dropped by almost a third in April, boosted by relatively benign market conditions.

The aggregate deficit of the schemes in the PPF 7800 Index decreased to £81.7bn at the end of April 2018, compared to £115.6bn the previous month. The rise reflects a funding level increase from 93.1% in March to 95.1% in April.

As of April, total assets were £1,577.4bn and total liabilities £1,659.1bn. Overall, 3,637 schemes were in deficit and 1,951 schemes in surplus.

PPF deficit levels have fluctuated sharply over the past months. At the beginning of the year, the deficit surged from £71.1bn in February to £115.6 bn in March 2018, highlighting the funds’ susceptibility to market movements.

Compared to the previous year, the fund’s overall performance has improved, with deficit levels of £179.8bn and a fundingvlevel of 89.5% being recorded in April 2017.

With fixed income representing the largest share in the fund’s asset allocation, it benefited from rising gilt yields. Throughout April, conventional 15 year gilt yields were up by 19 basis points while  index-linked 5-15 year gilt yields were up by 44 basis points. Meanwhile, the climate on equity markets was equally favourable, with the FTSE All Share Index rising by 4.2% month on month.

Boris Mikhailov, investment strategist, Global Investment Solutions at Aviva Investors argues that Liability Driven Investment Strategies should be used to manage interest- and inflation risk going forward.

“Later in May the Debt Management Office will issue the new fixed-interest gilt maturating in 2071 which will provide the longest duration fixed-interest gilt in the market. This could be an opportune time to accelerate or restructure the existing hedging programs with a view of making them more effective” he predicts.


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