The aggregate deficit of the 6,432 schemes in the PPF 7800 index is estimated to have decreased over the month to £280.3bn at the end of August 2012, from a deficit of £283bn at the end of July, the Pension Protection Fund (PPF) says.

Movements in the PPF 7800 index illustrate how the PPF's exposure to the scheme deficits in its universe of eligible schemes is changing in response to financial market movements.

The position of the schemes has worsened on the previous year, when a deficit of £126.1bn was recorded at the end of August 2011.

The funding ratio (assets as a percentage of s179 liabilities) of schemes rose this month from 78.9% to 79.1% at the end of August 2012. The funding ratio is lower than the 88.5% recorded in August 2011.

Within the index, total defined benefit (DB) scheme assets amounted to £1062.5bn at the end of August 2012. Over the month, scheme assets rose by 0.5% and over the year there was an increase of 9.9%. Total scheme liabilities were £1342.9bn at the end of August 2012, an increase of 0.2% over the month and an increase of 22.9% over the year.

The number of schemes in deficit at the end of August 2012 decreased compared to last month to 5,403, representing 84.0% of the total 6,432 DB schemes. This still means, however, 500 more schemes with a deficit than during the same period last year.

Understanding the impact of market movements

Though the monthly figures are generally quite volatile due to the high weighing of equities, they give an indication of how the long-term costs of pension schemes have risen.

Equity markets and gilt yields are the main drivers of funding levels. Scheme liabilities are sensitive to the yields available on a range of conventional and index-linked gilts. Liabilities are also time-sensitive in that, even if gilt yields were unchanged, scheme liabilities would increase as the point of payment approaches (this effect amounts to around 4% to 5% a year).

The value of scheme assets is affected by the change in prices of all the major asset classes, not just equity markets. However, due to their weight in asset allocation and volatility, equities are usually the biggest driver behind changes in scheme assets.

Over the month, assets rose by 0.5%, mainly reflecting higher equity markets. Liabilities rose by 0.2% over the same period; with conventional gilt yields and real yields remaining broadly unchanged.

Over the year to August 2012, 15-year gilt yields were down by 127 basis points and the FTSE All-Share Index rose by 6.1%. Over the month of August 2012, 15-year gilt yields rose by 3 basis points and the FTSE All-Share Index rose by 1.5%.

First published 11.09.2012

azeevalkink@wilmington.co.uk