The Pensions Regulator and Pension Protection Fund have today published the latest edition of their annual Purple Book, which provides statistics about the predominantly private sector defined benefit pension schemes whose members would be eligible for PPF compensation if the employer became insolvent. Some of the key points are highlighted below, along with Towers Watson comment.
More than one quarter of schemes closed to existing members
Table 3.1 (page 28) reports that 28 per cent of schemes are closed to future accrual by existing members (including the 2 per cent of schemes that are in the process of winding up), compared with 26 per cent a year earlier.
Mark Duke, a senior consultant at Towers Watson, said: “With funding levels badly under water, more employers may now decide that the first step towards solving the problem is to turn off the tap and stop adding to their liabilities. The pace of closure may have been relatively slow in the year to March but the trend is only in one direction.”
Proportion of assets in gilts/fixed interest overtakes proportion in equities
Table 7.2 (p56) shows that the proportion of defined benefit pension scheme assets in gilts and fixed interest investments overtook the proportion in equities for the first time. Some 38.5 per cent of assets were in equities (down from 41.1 per cent) and 43.2 per cent in gilts and other fixed interest investments (up from 40.1 per cent) – though not all schemes report asset allocation on the same date and the data are not adjusted for market movements.
Alasdair MacDonald, head of Investment strategy at Towers Watson, said: “It is not surprising to see UK pension funds’ allocation to equities being overtaken by that of bonds, given the need to reduce risk as they mature. Part of this shift is a result of recent market movements, but much of this is a deliberate attempt by many to de-risk. However, our research shows that on current trends it will be around 2040 before UK private-sector defined benefit (DB) pension schemes can fully de-risk unless they consider alternative strategies to just buying Gilts.
“In addition, we would urge funds to not only consider alternative strategies - such as investing in property and infrastructure assets that deliver low-risk, index-linked cash flows but not to use QE as an excuse for inaction. Many commentators suggest that QE has led to a significant fall in ILG yields and pension funds need simply to weather the current storm of low gilt yields for a few years, before they are able to de-risk at much more attractive terms. We do not share this view and furthermore believe there is a 20per cent chance that yields do not recover from current levels and developed markets repeat the experience of Japan; so would remind some funds again that markets can remain irrational for longer than an investor can remain solvent.”
Schemes have 60p for each £1 needed to secure benefits with an insurer
Table 4.1 (p34) estimates that, as at March 2012, assets in pension schemes were £676bn short of the amount needed to secure all liabilities with insurance companies (“buyout liabilities”).
Mark Duke said: “According to the PPF’s estimates, schemes only had 60p of assets in March for each pound they would need to pay an insurance company to take responsibility for paying all members’ pensions off their hands. Our monitoring of the prices insurers quote suggests that the position has not changed very much since then. If full buyout liabilities look like a frighteningly big number, it’s worth remembering that reforms coming out of Europe could require an even bigger estimate of liabilities – though they would also allow schemes to count things other than their investments as assets.
“Of course, there has only ever been enough capacity in the market to insure a small slither of total pension liabilities in a short space of time: outstanding liabilities are around £1,700bn, and the risk transfer market has never been much bigger than £10bn in a single year. While aggregate buyout deficits are a bit of a fictional number, they nonetheless underline how far away many schemes are from their ultimate objective of making all benefits secure. To make that journey shorter without a big cash injection from the sponsoring employer, schemes need to be alert to short-lived market opportunities and able to act quickly. This remains an evolving market, so those looking to transfer at least some liabilities to a third party need to keep an eye on how providers’ appetite to write business is changing as well as on how the financial markets are moving.”
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