Snakes, Ladders & Pension Deficits

We’ve experienced a rollercoaster ride so far this year when it comes to government bond yields.

For pension funds that haven’t hedged this risk, this has meant a lot of volatility in their position coming from the liability side of their balance sheet from one month to the next.

It’s amazing really that in the 8 months since last November liability valuations for most schemes will have done a sizable round trip – first rising by 10% then falling by the same amount, that’s quite some volatility – schemes that happen to cut a triennial valuation at the end of June might be feeling like they dodged a bullet, whereas schemes doing a valuation dated December 2014 or March 2015 might be showing a considerably worse position.

Of course one way to avoid this ongoing game of Snakes & Ladders is to hedge the interest rate risks on the liabilities.

INFOGRAPHIC – PPF 7800 Index Assets & Liabilities June 2015

Long dated interest rates (used to discount pension liabilities) rose by around 30bps in June, which according to data from the PPF meant that the aggregate liabilities of UK pension schemes fell by around £60bn, or 3% in June. Liabilities are around £160bn (10%) lower than their January 2015 peak, and are back to the levels we last saw in November 2014. 

PPF (10)

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