Decisions taken by a small number of defined benefit schemes could have a “significant impact” on future levels of active membership, a report by The Pensions Policy Institute, sponsored by MetLife Assurance forecasts.
Analysis of the report shows around 200 schemes – equivalent to just over 3% of all UK defined benefit schemes – account for approximately 65% of all active UK members highlighting the concentration of private sector DB membership in a small number of very large schemes.
The report “The changing landscape of pension schemes in the private sector in the UK”, which forecasts private sector DB membership will fall from around 1.6 million in 2011 to less than a million by 2020, outlines the potential risks for employers running DB schemes and strategies being adopted to meet the challenges.
Data from the report shows employers’ special contributions to defined benefit schemes have increased by more than 34% from around £11.9 billion in 2007 to around £16 billion in 2011 and the number of contingent assets recognised by the Pension Protection Fund has increased by 20% from around 750 in 2010/11 to around 900 in 2011/12, as employers have sought to improve scheme funding.
If Solvency II requirements are extended to DB schemes, the schemes would be required to hold an increased amount of capital to increase the likelihood they remain solvent under prospective stress environments, putting a further strain on funding and the future of DB schemes.
Wayne Daniel, Chief Executive Officer at MetLife Assurance said: “Future levels of active membership of private sector defined benefit schemes is very much linked to decisions taken by a small number of large schemes. Just 200 schemes in the UK have 10,000 or more members including active and deferred members as well as pensioners. So any decisions made regarding these individual schemes could potentially have a large impact.
Sustainable funding remains the biggest challenge for the majority of sponsors. With a considerable increase in schemes requiring employer special contributions, and the possibility that schemes will need to hold more capital, affordability and the ability of schemes to meet their long-term member commitments will continue to sharpen the focus on associated DB costs”.
Changing investment strategies mean around 40% of defined benefit assets are now invested in equities compared with 60% in 2006. Investment in bonds has risen from 30% to around 40% over the same period while the total value of liability driven investment assets under management has increased from £243 billion at the end of 2010 to around £312 billion at the end of 2011, an increase of almost 30%
Daniel continues:
“As the gap between assets and liabilities continues to grow, the report acts as a very useful resource detailing various strategies that trustees and sponsors may choose to consider when looking to remove risk from their balance sheet and guarantee the long-term security of their member benefits.”
The full report is available for download at www.metlife.co.uk/metlifeassurance or www.pensionspolicyinstitute.org.uk
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