While other indices see wild volatility in the deficit positions of the PPF7800, the FABI index is already showing the material advantage of a smoothed approach to valuations.
To put it in behavioural terms, you don’t have to popping champagne corks one month and reaching for the Prozac the next!
So here are the rather boring results for last month, which don’t look much different than from the month before!
The interesting point is that First Actuarial’s analysis shows that a real investment return of only minus 0.7% is required for the 6.000 UK defined benefit schemes to be 100% funded on a best-estimate basis.
DB pension funds continue to look healthy despite inflation rise
The First Actuarial Best-estimate Index (or “FAB Index” for short) fell slightly over the month to 31 October 2016. But, the FAB Index continues to show that the UK’s 6,000 defined benefit (“DB”) pension funds still have a healthy surplus of £306bn..
The slight fall in the FAB index is due to an increase in expected future inflation coupled with a reduction in the market value of fund assets (largely due to rising gilt yields).
In contrast, the PPF 7800 index deficit fell over the month largely because it is calculated using the returns on gilt yields, regardless of how the pension funds are actually invested.
Analysis by First Actuarial also shows that an overall investment return of only 3.1% pa is required for the UK’s 6,000 DB pension funds to be 100% fully-funded on a best-estimate basis, the so called ‘breakeven’ investment return.
|FAB Index||Assets||Liabilities||Surplus||Funding Ratio|
|31 October 2016||£1,438bn||£1,132bn||£306bn||127%|
|30 September 2016||£1,450bn||£1,092bn||£358bn||133%|
The assumptions underlying these results are as follows:
|Assumptions||Expected future inflation (RPI)||Expected future inflation (CPI)||Weighted-average investment return||“Breakeven” investment return|
|31 October 2016||3.8% pa||2.8% pa||4.4% pa||3.1% pa|
|30 September 2016||3.4% pa||2.4% pa||4.4% pa||2.8% pa|
Rob Hammond, Partner at First Actuarial said:
“It is not surprising that an increase in expected future inflation, and the knock-on effect that a rise in gilt yields has on the market values of the bonds held by the UK’s defined benefit pension funds, has resulted in a reduction in the best-estimate funding position. However, as the long-term future investment returns underlying the FAB Index have remained fairly stable over the month, the reduction is small.
“Our analysis shows that a long-term investment return of only 3.1% pa is required to achieve a best-estimate funding position of 100%. This ‘breakeven’ investment return is equivalent to only -0.7% pa in real terms, which is by no means an unrealistic expectation for future growth.”
The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension funds.
The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,945 UK DB pension funds on a section 179 basis, together with data taken from The Purple Book, jointly published by the PPF and the Pensions Regulator.
Rob Hammond is available for interview. Please contact:
About First Actuarial
First Actuarial is a consultancy providing pension scheme administration, actuarial and consultancy services to a wide range of clients across the UK.
We advise a mixture of open and closed defined benefit schemes with our clients concentrated in the small to medium end of the pension scheme market. Our clients range across a number of sectors including manufacturing, financial services, not for profit organisations and those providing services previously in the public sector.