At the end of September 2018, the PPF7800 Index of UK pension funding levels had reached a seven-year high*. The estimated average buyout funding level, published in The Purple Book at the end of 2018, also reached its highest point since before the financial crisis. Anecdotally, many plans reported having reached full funding on a technical-provisions basis during 2018, boosted by the “longevity dividend” as slower-than-expected improvements in longevity were reflected in liability valuations. As a result, large amounts of pension money reported to have been taken out of the equity markets over the course of the year and placed into more defensive strategies, locking in these funding-level gains. Surveys of the UK pension risk transfer market project record volumes for 2018.
Events in the fourth quarter of 2018 – the equity market sell-off and the UK High Court of Justice ruling on guaranteed minimum pension (GMP) equalization – will have made a dent in funding levels. Nonetheless, many funds appear to have taken tangible steps along their de-risking journeys and may feel that the final furlong is coming into view at last. What lies ahead is, if not quite virgin, relatively unexplored territory. The UK leads the field in this race towards the endgame: UK defined benefit pension funds have matured further and faster than their international counterparts, have taken bigger steps to manage both asset and liability risk, and enjoy a proportionately bigger and more active pension risk transfer market. The government’s Freedom and Choice in pensions has accelerated the maturing of pension funds through increasing transfer out activity, and the ongoing consolidation debate may well mark another critical milestone.