The collective pension scheme deficits have grown by £80 billion over the past fortnight, amounting to an average daily fall of £8 billion, revealed an independent model of the Pension Protection Fund 7800 index by Ignis Asset Management.
The model shows that since the beginning of August, five years forward yield movement of gilts and the FTSE index have driven the deficits down to the Q2, 2009 levels. Ignis used the composite model to replicate the complex PPF formula.
After witnessing a brief surplus at the start of 2011, the deficits are witnessing a “double dip”, the firm observed.
“The close relationship between the number of funds in surplus and the aggregate deficit shows that pension funds failed to take advantage of these two periods of relief to close the substantial asset-liability mismatch in their funds exposing their balance sheets to massive volatility,” said Ignis chief market economist Stuart Thomson.
The five year forward yield movements of 15 year gilts revealed the enormous influence pension funds’ hedging activities have on the long end of the gilt market.
It may be recalled here that the rise in yields of long maturity gilts after pension schemes tumbled to deficits after the Lehman Brothers crash had prompted the Bank of England start its first Quantitative Easing measures.
The funds however, failed to capitalise on improving market conditions before the latest blow-up due to confusion over the switch to Consumer Price Index, Ignis observed.
“The resulting recovery in pension fund deficits provided a perfect opportunity for pension funds to de-risk, but the uncertainty over the shift from retail prices to consumer prices provided an excuse to wait and hope for better levels,” said Thomson.
The Ignis model tracks the PPF Index formula closely and has a 70 per cent correlation.
The PPF 7800 Index showed last week that collective scheme deficits have jumped to £67.3 billion in July from £8.3 billion.