Rates Rollercoaster Continues

Any pension scheme looking to produce a valuation as at 30 June 2015 is likely to be showing a more favorable overall position than they would have done in March 2015 or December 2014 (as demonstrated by data from the PPF 7800 index of pension funds updated to May 2015 below). The overall funding level of schemes in the PPF index – as at the end of May – was around 3% higher than the end of March (84% vs 81%*) and around 7% higher than the low reached at the end of January.

What’s the main driver behind the improvement?

Put simply, its a continuation of the rollercoaster ride we’ve experienced over the last year or so in government bond yields. UK gilt yields are (at the time of writing) around 40bps higher than they were at the end of March and 30bps higher than the start of the year, and this has driven a fall in the liabilities (in the PPF 7800 index the value of the liabilities has fallen by around 4% since end March and around 7% since the yield lows around the end of January).

Snakes & Ladders

This really re-enforces the benefits of hedging the exposure to the liabilities, immunizing the scheme (to some degree) against these yield swings and moving away from the continuous game of “snakes & ladders” that UK pension schemes have experienced over the years – whereby the funding level rises and falls as yields go up and down. A more subtle but relevant secondary point is the fact that despite the overall low absolute level of yields, the size of movements from one month to the next is as big or bigger than it has been at higher levels of yields, which re-enforces the case for hedging, even at  today’s undeniably low absolute level of yields (by historical standards). PPF_May 15 PPF_May 2015

* Funding level refers to the PPF basis funding level, which represents a different level of benefits and discounting basis to that used by most schemes (for more details see here). The PPF funding level is likely to be higher than a conservative self-sufficiency measure, or a measure that reflects the cost of buying out a scheme’s full benefits.

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