The funding deficits of FTSE 100 pension schemes have reduced, according to research conducted PensionsFirst(PF).
The latest PF Risk Report, a monthly analysis of defined benefit (DB) pension risk for UK FTSE 100 firms, found that the proxy funding deficit now stands at £84 billion, compared to £134 billion in August.†
Despite this, the schemes’ aggregate risk position has remained relatively constant. †The value-at-risk only fell from £31 billion to £30 billion (at a one in 20 value-at-risk confidence level) in January.
Benjamin Reid, chief executive officer of PensionsFirst Analytics, said: “While the increase in funding levels is clearly a boon for pension schemes, it means very little unless schemes take the golden opportunity afforded by these favourable market conditions to take risk off the table.
“Over the past five months, the deficit has reduced substantially and banking these gains could cut years off a recovery plan. Yet unless schemes are proactive, the PF Risk Report highlights that the risk they are running means that the deficit could increase by £30 billion or more next month – eradicating most of the improvements seen recently.”
The report found that gilt yields accounted for nearly £25 billion of gains in January, while asset performance had less of an impact; the contribution to deficit reduction caused by rising equity values over the same period was only £13 billion.
“The key for schemes in prioritising their de-risking options is a better understanding of the exposures that are actually driving improvements in the deficit,” said Reid. “While large exposures to interest rates and equity may have worked in pension schemes’ favour recently, ultimately it is a risk that they should not be taking.”
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