FABI says “no no” to the deficit yo-yo!


The First Actuarial Best-estimate Index (FABI) continues on a more predictable flight.

An actuary speaks!

Rob Hammond, who oversees the number crunching behind FABI says:

“Yo-yo deficits do nothing to restore people’s confidence in their pensions. FABI paints a truer picture. If you use our best-estimate approach you see an aggregate surplus in pension schemes with little month on month volatility”.

Smaller print!

Over the month to 31 December 2016, FABI was stable with the UK’s 6,000 defined benefit (DB) pension schemes maintaining a healthy overall surplus of £270bn.

The slight dip was due to a fall in gilt yields over the month, a reverse of the rise in gilt yields seen in November. Because FABI is calculated using returns from a wide return of assets (not just gilt yields), FABI is much more stable.

You can see this in the chart below which compares the FAB Index to the PPF 7800 index over the last 3 months, illustrating the relative falls and rises in the two indices over this short period.

Corporate bond yields also fell over December which will be bad news for companies with accounting year-ends at 31 December 2016. They’ll be showing considerably higher deficits than those with a year-end just one month earlier.



Technical note

These are the underlying numbers used to calculate FABI.

The overall investment return required for the UK’s 6,000 DB pension schemes to be 100% fully-funded on a best-estimate basis – the so called ‘breakeven’ (real) investment return – has remained constant at around inflation minus 0.7 % pa. Such a target return should not present trustees (or employers) with sleepless nights.

FAB Index over the last 3 months Assets Liabilities Surplus Funding Ratio ‘Breakeven’ (real) investment return
30 Dec 2016 £1,476bn £1,206bn £270bn 122% -0.7% pa
30 Nov 2016 £1,443bn £1,147bn £296bn 126% -0.6% pa
31 Oct 2016 £1,438bn £1,132bn £306bn 127% -0.7% pa

The assumptions underlying the FABI results are also consistent:

Assumptions Expected future inflation (RPI) Expected future inflation (CPI) Weighted-average investment return
31 December 2016 3.7% pa 2.7% pa 4.1% pa
30 November 2016 3.7% pa 2.7% pa 4.3% pa
31 October 2016 3.8% pa 2.8% pa 4.4% pa

Footnote: Best estimate transfers

The volatility in the PPF 7800 index is reflected in Cash Equivalent Transfer Values over the last quarter. Transfer values calculated using a gilts based discount rate have fallen by as much as 15% from a September high, whereas those calculated using a discount rate that contains a more typical asset mix of bonds and equities (the constituents of FABI), have been much more stable.

Another reason to say “no-no” to the “yo-yo”!


Notes to editors

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 schemes on a section 179 basis, together with data taken from The Purple Book, jointly published by the PPF and the Pensions Regulator.

The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension schemes.


Rob Hammond is available to talk to. Please contact:

Rob Hammond on 0161 868 1320 or rob.hammond@firstactuarial.co.uk, or Jane Douglas on 0161 348 7933 or jane.douglas@firstactuarial.co.uk.


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.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to FABI says “no no” to the deficit yo-yo!

  1. Mike Otsuka says:

    Is the December weighted-average investment return still based on a best estimate of return on equity of 7.47% and an assumed equity risk premium of about 6%?

  2. henry tapper says:

    Sorry not to have got back to you Mike, if you drop me a line on henry.h.tapper@firstactuarial.co.uk. I’ll send you all the assumptions in a spreadsheet

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