According to JLT Pension Capital Strategies the Total deficit for all Uk Private Sector Defined Benefit Schemes increased to £143 billion as at 31 March 2013 which is an increase from £117 billion as at 28 February 2013, representing funding levels of 89% and 91% respectively. The continued increase in deficits will come as a surprise to many individuals especially considering that global markets have, on the whole, increased during 2013 with both the S&P 500 and Dow Jones reaching record highs.
So why have scheme deficits not improved in line with global equity performance?
Unfortunately the vast majority of schemes have been actively exiting equity investment strategies in favour of perceived lower risk investments such as high quality corporate and government bonds. In fact, at the end of 2012, FTSE 100 pension schemes had on average 56% of their assets invested in bonds.
Bond yields have fallen over the past couple of years as investors burnt by the financial crisis all seek the same “safe haven” investments such as UK Government bonds and this coupled with the Uk’s aggressive quantative easing program has ensured that bond yields have remained at near record lows. Just when there was a ray of light and bond yields were starting to rise the Cyprus banking crisis came along which is likely to be a key catalyst in keeping UK bond yields low as the UK is considered a safer haven for money than many countries within the troubled Euro zone.
2012 was a very difficult year for pension schemes and it is our view that 2013 will be no different.