In the thirteenth edition of the Purple Book, the Pension Protection Fund (PPF) points to significant risk in the defined benefit (DB) pension universe, despite an increase in the aggregate funding level in DB schemes in the last financial year (March 2017-March 2018).
While the aggregate funding level of DB schemes has risen 5.2 percentage points to 95.7 per cent, nearly two thirds of schemes remain in deficit, with these schemes bringing a combined deficit of £187.6 billion.
The latest figures from the Purple Book also show the average recovery plan length has not shortened and remained stubbornly high at 7.8 years.
Scheme funding
The aggregate funding level of DB pension schemes is the highest it has been since 2014, having increased to 95.7 per cent (on an s179 basis). The result is the aggregate deficit in the 2018 dataset is £70.5 billion, less than half that in March 2017 when it was £161.8 billion.
Improvements in final salary scheme funding are due to higher gilt yields driving down liability values, a rise in equity markets in the year to March 2018, and the use of more up-to-date valuations, along with the continued shrinking of the DB universe.
Andy McKinnon, Chief Financial Officer of the PPF says: “Whilst the improved aggregate funding level is welcome, we should not lose sight of the challenge ahead. The current economic and political backdrop coupled with recent stock market volatility means companies should continue to take steps to de-risk their schemes.”
Scheme demographics
The Purple Book data reveals that the proportion of company DB schemes open to new members has stayed steady at 12 per cent, but the number of PPF eligible DB schemes has decreased from 5,588 schemes in 2017 to 5,450 in 2018.
Large company schemes with over 5,000 members make up only seven per cent of the total number of schemes in The Purple Book 2018 dataset, but represent almost 75 per cent of total assets, liabilities and members.
Asset allocation and de-risking
There has been a continuation of de-risking trends, with the proportion of equities held decreasing and bonds increasing. Within equities there has also been a shift in the share of UK quoted equities which has decreased to 18.6 per cent, from 20.5 per cent, while exposure to overseas equities has increased.
Pension transfers
A rising trend highlighted in this year’s data has been DB pension transfers, with the highest number recorded since the introduction of Pensions Freedoms in April 2015, amounting to £10.6bn in the first quarter of 2018. While this number has increased significantly, it remains small in the context of the pension universe which has liabilities totalling around £1.6 trillion.
Stephen Wilcox, Chief Risk Officer of the PPF, comments: “The data in the Purple Book is vital for helping us understand the risks the PPF faces. Our obligation to members is likely to stretch into the next century and in an environment of significant uncertainty, where we believe conditions will remain tough in 2019, assessing and managing our risks is everything.”
“The Purple Book also highlights the necessity of schemes undertaking effective risk management and reaffirms the importance of the PPF safety net for members of schemes that fail to pay what they promised.”
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