97% of schemes are closed to new members
Just 3% of large final salary schemes remain open to new members
57% of schemes have a deficit on their company accounting basis
Significant activity seen in the insurance market as schemes look to transfer risk
A significant amount of transfers out since the introduction of more pension flexibility in April 2015
The survey reveals that 60% of final salary schemes are closed to new members and a further 37% are also closed to future accrual, leaving just 3% open to new members. A greater proportion (29%) of Career Average Revalued Earnings (CARE) schemes remain open to new members. For both, the number of schemes closed has increased year on year – mitigating future pension risks from a company perspective.
57% of schemes have a deficit on their company accounting basis, which is lower than last year, when 67% of schemes were in deficit. Schemes with a lower, or no, deficit may be more able to secure their liabilities with an insurance company.
The average annual contribution made by sponsoring employers to fund their scheme deficit was around £60m. The variation in deficit contributions was substantial, ranging from around £0.75m to £338m. These significant drivers are a factor for the average funding level across these schemes being 98%, a marginal improvement on last year’s survey.
The survey has also highlighted a step-up in the number of transfers out from schemes over the survey period. For 10 of the very largest schemes in the survey, with assets in excess of £10bn, the median year-on-year increase in cash amounts transferred out was 80%.
Andrew Vaughan, partner at Barnett Waddingham, said: “The private sector’s big schemes are the industry’s trendsetters. The activity we are seeing in liability management programmes as a result of the pension flexibility changes in 2015, as well as the evolution of liability-driven investment strategies which are now often focused on targeting a bulk annuity transaction, will inevitability work their way down to smaller schemes.
“Only a handful of big defined benefits schemes with assets over £1bn remain open to new members and the number closed to future pension accrual is increasing year on year. Many of these will ultimately be looking to the insurance market to transfer risk through buy-outs or buy-ins, medical underwriting and longevity risk transfers. We have seen a significant amount of activity in these markets in the last year and we expect this to continue.”
Other key findings for the survey:
• The average 3 year investment return was around 7.6% per annum.
• There was an increase in the asset allocation to pooled funds and alternative asset types such as derivatives, emerging market currency and hedge funds, with a corresponding reduction in equity investments.
• The average PPF levy paid was £2.6m, corresponding to 0.03% of scheme assets.
• Innovative liability management deals are becoming more accessible to mid-sized pension schemes.
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