Every month we publish data called the PPF 7800 index. But what exactly is the PPF 7800 and why do we calculate it?
Its main purpose is to estimate the size of the eligible UK defined benefit pension scheme universe. It also enables us to approximate the size of the risk we face in the very unlikely event all employers that run eligible schemes were to become insolvent.
When the index was first introduced in 2007, there were approximately 7,800 eligible defined benefit schemes. That’s where the index gets its name. Now there are just over 5,300 schemes.
Key information about the defined benefit pension universe
The index summarises a series of key actuarial information about the universe, including:
The total value of all assets held by the universe – aggregate assets
The estimated cost of purchasing the same level of benefits offered by us from an insurer for all members in the universe. We use a series of assumptions to estimate this – more on them later on - aggregate liabilities
The number of schemes where the estimated cost of purchasing benefits for their members from an insurer is greater than the current assets they hold. These schemes are said to be in deficit – number of schemes in deficit
For all schemes in deficit, the difference between the estimated cost of purchasing benefits with an insurer and the current assets held – deficit of schemes in deficit
We use aggregate information to monitor the overall size of the defined benefit universe. Over time it tracks the total assets held by schemes as well as what it would cost an insurer to provide the same level of benefits as we do.
If all scheme employers were to become insolvent at once, we would have to cover the deficit of any scheme with insufficient funds to purchase the same level of benefits with an insurer. This amount is approximated in the index by the total deficit of schemes in deficit. Although this is a very extreme scenario, it’s a useful number as it helps us monitor and manage our total risk exposure.
Recent changes to pension scheme valuations
In May 2021, we updated the actuarial assumptions used in the PPF 7800 index to estimate the cost of purchasing the same level of benefits from an insurer. These assumptions are also used in s179 valuations which feed into our calculations of the annual levy we charge eligible schemes.
A review of the valuation assumptions indicated our previous assumptions had fallen out of line with the current market pricing, and our pricing estimates were on average too high for many schemes.
We set out our proposals on the possible changes to the actuarial assumptions in a consultation with the wider market earlier this year.
What this means in practice?
Our insurer pricing estimates had generally been too high, so changing the assumptions brought down the aggregate liabilities for the eligible defined benefit pension scheme universe, by 2.7 per cent. This meant fewer schemes had deficits and the total deficit of schemes in deficit also fell.
The changes to assumptions is good news for many pension schemes. It illustrates that insurer pricing is currently cheaper than we previously estimated. Therefore, if a scheme’s sponsoring employer was to become insolvent, they are more likely to be able to secure our benefits with an insurer and in some cases even higher benefits than those provided by us.
Maria Graney is one of our Actuaries.