Pensions - Articles - Hymans Robertson on the 2016 edition of the Purple Book


Hymans Robertson respond to the PPF's publication of the 2016 edition of the Purple Book. Calum Cooper, Head of Trustee Consulting at the firm said Defined Benefit schemes have had an unprecedented amount of attention this year due to the volatility of deficits, high profile scheme failures as well as a raft of closures. However, the figures published today don’t capture the acceleration in schemes closing we’ve seen through the remainder of 2016. Rising costs have been the main driver behind this, with it now taking 50% of pay to provide a DB pension. Low gilt yields are the reason it’s now so expensive.

 “Back in 2010 we had 2.4m active members of DB pension schemes. Roll forward to today that figure is now 1.6m. If you project that forward, there won’t be any active DB scheme members by 2028. That’s clearly not how things will pan out, but it does clearly demonstrate the pace of decline due, in many cases to some combination of unmanaged costs, uncertainty and complexity.
 
 “Increasing numbers of scheme closures push more into a position where they have less cash coming in through contributions than they have going out in pension payments – i.e. they become cashflow negative. Our recent analysis of FTSE350 DB schemes revealed that 57% are now in this territory with schemes paying out £20bn p.a. and this is anticipated to rise to £100bn within 10 years. The combination of scheme’s closing and more people cashing in DB benefits post Freedom and Choice has outweighed the increase in the amount of cash companies have put in to their DB schemes over the year. We expect the number of schemes that are in this position to be much higher next year as the increasing trend of scheme closures, people cashing in DB pensions and the maturing of pension schemes unfolds. The need to manage cashflow risk and uncertainty – rather than a myopic focus on balance sheet deficits and discount rates - has never been greater.
 
 Discussing the deficit figures, he added: “More significant than the headline figures is the volatility seen in deficit positions since March - driven by events such as Brexit and Trump’s election, with fluctuations of £200bn along the way. Brexit, and the programme of quantitative easing which followed, sent gilt yields south pushing the UK DB deficit to an excess of £1 trillion. This was followed by the election of Trump which saw fixed income positions unwind and the deficit drop to £825bn. These huge gyrations in headline figures should not knock schemes off course. A long term focus needs to be maintained.

 Looking ahead, he concluded: “The spotlight on DB is unlikely to shift any time soon. Early next year the Government is due to publish a Green Paper on the future of DB. This could herald changes. It’s widely expected to look at the valuations process, which we’d agree is anachronistic in the context of the technology available to DB schemes today. The use of gilts and the price inflation index used by schemes could also be under review. The consolidation of smaller schemes is likely to be another theme.
 
 “While a review is welcome we need to maintain perspective. The reality is most schemes will be able to pay their benefits in full. Nonetheless, 1 in 4 will see no improvement in deficits over 20 years unless they take a different approach. The number could go down to 1 in 12 if an integrated approach that includes investment, covenant risk and contributions is adopted across UK DB. This has to be the main focus for DB schemes going forward and it doesn’t require a wholesale re-evaluation of the DB landscape.” See Hymans Robertson’s ‘A Better Future for DB Report’.
  

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