PPF aggregate deficit rises to £115.6bn

The PPF has recently released its monthly funding update, illustrating that the aggregate deficit of the 5,588 schemes in the PPF 7800 Index is estimated to have increased over the course of the month to £115.6bn at the end of March 2018.

In comparison, there was an aggregate deficit of £72.1bn at the end of February 2018.

Aviva Investors investment strategist Boris Mikhailov commented: “The Trump-instigated trade war fears have dominated the headlines in March, creating a seesaw effect on global financial markets with equity markets plummeting and safe heaven assets, such as gilts, rallying. In the UK, the continuing demand for gilts from pension schemes and the Bank of England’s Asset Purchase Facility (APF) embarking on its £18bn reinvestment programme, were also major forces driving up gilt prices over the month.

“The sharp correction in equity markets, where the FTSE All-Share fell by over 2%, will have caused some pain to the balance sheets of many pension schemes. However, what would have really hurt was the fall in long-term gilt yields of around 20bps per annum. This is because, on average, pension schemes are still only hedging around a third of its interest rate risks, so any movements in long-term gilt yields would have three times more impact on its liabilities than the assets.”

Mikhailov has also stated that fund level volatility is set to continue until pension schemes make “significant changes” to investments strategies, such as placing less reliance on equity markets and hedging more interest rate risk.

However, there is a range of alternative methods that will achieve more consistent returns whilst also protecting from severe drawdowns.

“Most pension schemes could benefit from a Cashflow Driven Investing (CDI) strategy, often labelled as an ‘insurance way of investing' by beginning to invest part or, in some instances, most of their portfolios in CDI assets to help match liability cashflows whilst generating returns in excess of gilts. This approach could provide much greater certainty of delivering the return and matching liability cashflows when compared to a ‘traditional’ approach of investing in the growth and matching assets. The CDI strategy works particularly well when combined with a Liability Driven Investing (LDI) strategy that helps manage any remaining mismatch between the assets and liabilities,” Mikhailov said.

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