The ninth edition of the Purple Book, published by the Pension Protection Fund and the Pensions Regulator monitors the risks faced by 6,057, mostly private sector Defined Benefit (DB) pension schemes. These cover over 11 million scheme members across the UK. Purple Book is the only summary of its kind, based on actual scheme data.
The data tracked by the Purple Book shows that pension schemes continue to reduce their risk as asset allocation trends continue, but the decrease in equity shares has levelled off as the UK economy continues to recover. For the second time since the inception of the Purple Book allocation to gilts and other fixed income instruments fell.
Scheme funding improved from 84 per cent in 2013 to 97 per cent. On a full buy out basis it increased from 61 per cent to 67 per cent– reflecting both the impact of higher gilt yields on liabilities and the impact of higher equity markets on assets.
However, between the end of March 2014 and the end of September 2014, scheme funding has deteriorated by around 9 percentage points, reflecting lower gilt yields.
The allocation to fixed interest assets fell from 44.8 per cent in 2013 to 44.1 per cent in 2014. It has been on an upward trend since 2006 when the share was 28.3 per cent.
The decline in the number of schemes still open to new members like last year is slowing down, dropping from 14 per cent to just 13 per cent.
The percentage of schemes closed to new members fell slightly from 54 per cent to 53 per cent and the Purple Book saw the percentage of schemes that closed to future accrual rise again in 2014 – from 30 per cent in 2013 to 32 per cent in 2014. This is a continuation of the trend that has been in place since the start of the Purple Book in 2006.
Andrew McKinnon, Pension Protection Fund’s Chief Financial Officer said: “Once again the Purple Book has shown a slowdown in de-risking, demonstrating that the steady decline has levelled off and could point to the end of a long term trend. With the pensions reforms set to be implemented next year, it will be interesting to see if and how the changes impact the risks faced by DB pension schemes.
“The comprehensive data that we collect annually through the Purple Book is an invaluable gauge of risk as we move towards our goal of being financially self-sufficient by 2030. Whilst there has been a marked improvement in scheme funding, risks do still remain and we are confident that our funding strategy continues to be appropriate to ensure the protection of our members.”
The Pensions Regulator’s director of case management and intelligence, Geoff Cruickshank added: “As the Purple Book highlights, DB schemes remain a significant part of the pensions landscape, with over 11 million members in around 6,000 schemes and more than £1trillion of assets.
“Our new objective to minimise any adverse impact on employer growth has helped focus our approach to DB schemes. There is no doubt that a fine balance has to be struck in order to provide security for pension schemes while at the same time giving employers flexibility to invest in business growth.
“We believe that our new DB code of practice and regulatory strategy represent a common sense approach to managing this balancing act. It is important that trustees and employers work collaboratively, take a long-term view and manage risks appropriately, as set out in the code. We will continue to offer support and recently ran a number of workshops, helping those involved to understand and apply the new code as well as listening closely to their thoughts, concerns and experiences.”
Top ten Purple Book highlights:
1. The aggregate s179 funding position of eligible schemes at 31 March 2014 was a deficit of £39.3 billion falling 81% from £210.8 billion, the previous year.
2. The insolvency rate among sponsoring employers of eligible schemes rose less than the national insolvency rate during the financial crisis. The national insolvency rate has been falling gradually over the last two years while the PPF insolvency rate has fallen sharply over the last three quarters.
3. Schemes continue to de-risk as asset allocation trends continue but the decrease in equity shares has slowed.
4. Average asset allocations of UK equities continued to decline and for the first time overseas equity shares is more than double the UK equities share.
5. In 2013/14, the number of schemes paying no risk based levy decreased and represented 17 per cent of total schemes, compared to 19 per cent for 2012/13 as the smoothed level of funding used in the levy formula deteriorated.
6. Schemes which carried out bespoke stress testing on a voluntary basis reported a lower investment risk. 131 schemes performed bespoke tests, 331 carried out voluntary tests and 5,595 schemes followed standard test methodology for their standard 2013/14 levy calculation.
7. There was a significant reduction in long-term risk to the fund during 2013/14, largely a result of an improvement in the PPF’s own funding level during the same period.
8. In 2012/13, the PPF made compensation payments of £445.1 million compared to £203.1 million in 2011/12
9. Total number of contingent assets in place for the 2014/15 levy year was about 780, somewhat lower than in the previous year. This reflected a fall in the number of Type A contingent assets.
10. Eligible schemes had, by April 2014, certified about £25.6 billion of deficit reduction contributions to reduce deficits for the 2014/15 levy year.
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