Defined Benefit  

PPF schemes in surplus after calculation change

PPF schemes in surplus after calculation change

About 5,450 defined benefit (DB) schemes in the Pension Protection Fund (PPF) 7800 Index have moved into surplus after changes to the way their funding levels are being calculated.

The pension funds had an excess of £14.3bn at the end of November, which compared with a deficit of £67.2bn at the end of the previous month.

The changes to the index calculations meant the funding level of these schemes increased from 95.9 per cent in October to 100.9 per cent the following month.

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The pensions lifeboat has updated the index calculations to reflect the Purple Book 2018 dataset, published last week (December 3). Changes were also made to the actuarial assumptions for s179 valuations used to measure the deficit/surplus, which resulted in further increases of the funding level, the PPF stated.

The lifeboat is required by legislation to keep its assumptions up-to-date and in line with current pricing in bulk annuity business, since its s179 valuation is based on the value that would have to be paid to an insurance company to take on PPF levels of compensation.

Since the last update of the assumptions in November 2016, there have been a weakening in the assumption for future improvements in life expectancy and lower prices in the bulk annuity business.

After introducing the new parameters, DB schemes had assets worth £1.58trn in total alongside liabilities of £1.57trn. There were 3,008 schemes in deficit and 2,442 schemes in surplus.

According to Andy Tunningley, head of UK strategic clients at BlackRock, the most significant reason for the funding level improvement in November was "liabilities falling by 5.4 per cent, primarily driven by the PPF’s use of updated assumptions, contributing -5.1 per cent of the change".

He said: "Nevertheless with over 3,000 schemes still in deficit, trustees are not out of the woods yet and even those schemes in surplus are still likely to be some way from self-sufficiency.

"The latter should be focusing on capturing these gains and considering de-risking, whether by trimming their growth assets, increasing hedging and/or more closely matching their cashflows."

maria.espadinha@ft.com