Defined Benefit  

Two thirds of DB schemes in deficit

Two thirds of DB schemes in deficit

Almost two thirds (63 per cent) of defined benefit (DB) schemes in the UK are running at a deficit, according to the Pension Protection Fund (PPF).

According to the PPF Purple Book 2018 released yesterday (December 3), these pension funds have a combined shortfall of £161.8bn.

Nevertheless, the aggregate funding level of DB schemes has risen 5.2 percentage points to 95.7 per cent, the highest it has been since 2014.

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Improvements in final salary scheme funding were due to higher gilt yields driving down the value of liabilities, 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, the pensions lifeboat said.

The Purple Book is an annual overview of the DB schemes eligible for PPF protection.

PPF figures are calculated on a s179 basis, representing the value that would have to be paid to an insurance company to take on PPF levels of compensation.

Andy McKinnon, chief financial officer of the PPF, said: "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 mean companies should continue to take steps to de-risk their schemes."

The Purple Book data revealed the number of DB schemes open to new members had stayed steady at 12 per cent, but the number of PPF eligible pension funds had decreased from 5,588 schemes in 2017 to 5,450 in 2018.

Large company schemes with more than 5,000 members made up only seven per cent of the total number of schemes, but represented almost 75 per cent of total assets, liabilities and members, it added.

When compared with last year’s results, there has been a decrease of 0.2 percentage points in deferred members, to 45 per cent. The remaining 41 per cent are pensioners and 14 per cent are active members.

PPF also noticed the relevance of pension transfers, which hit £10.6bn in the first quarter of 2018, according to data from the Office for National statistics.

While this number had increased significantly, it remained small in the context of the pension universe which has liabilities totalling around £1.6trn, the lifeboat said.

Stephen Wilcox, chief risk officer of the PPF, said the lifeboat's obligation to members was "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."

He added: "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."

In the year to 31 March 2018, 50 new schemes entered PPF assessment. This was similar to the number in each of the preceding three years, but much lower than before, it said.

However, due to the large size of a few of these claims, the total value amounted to £1.7bn, the highest of any year (ending 31 March) in the PPF’s history. As at 31 March 2018, seven schemes in assessment had liabilities of more than £250m, compared with three as at 31 March 2017.