In its twelfth edition of the Purple Book1, the Pension Protection Fund (PPF) reveals that while the proportion of open schemes has remained relatively steady in the twelve months to March 2017, the number of schemes closed to future accruals has seen a marked increase.
The figures show 12 per cent of DB pension schemes are currently open to new members, falling from 13 per cent in 2016 and down from 43 per cent in 2006 (when Purple Book records began).
Conversely, the number of schemes closed to future accruals has risen to 39 per cent in 2017, up from 35 per cent in 2016. This is a more notable rise when compared to the steady trend seen over the preceding years.
The Purple Book reveals that the aggregate proportion of schemes’ assets invested in equities continue to fall, from 61 per cent in 2006 to 29 per cent in 2017. The trend away from UK quoted equities is even more noticeable with a decline from 29 per cent of assets to just 6 per cent, challenging the perception that pension funds own a huge proportion of the UK stock market.
At the same time, the proportion of bonds rose from 28 per cent in 2006 to 56 per cent in 2017, a sign that as schemes mature they are more likely to hedge. The proportion invested in instruments other than bonds and equities fell from 18 per cent to 15 per cent over the same period.
Scheme funding has shown considerable volatility over the last 12 years. In 2017, however, it has continued its positive trajectory, rising to the highest level in 3 years. On a s179 basis, the funding level reached 90.5 per cent in the year to the end of March 2017, rising from 85.8 per cent in 2016. Meanwhile the aggregate deficit fell to £161.8 billion from £221.7 billion a year earlier.
Market movements made a small negative contribution to funding – the impact of lower gilt yields on liability values more than offset the impact of the rise in equity markets and bond prices on assets. More up-to-date valuations and the shrinking universe also contributed to the improvement.
Scheme sponsors have continued to make deficit reduction contributions. Data from the Office for National Statistics2 show that in the year to 31 March 2017 sponsoring employers made £11.4 billion in special contributions (i.e. those in excess of regular annual contributions) compared with £16.3 billion in the year to 31 March 2016.
At the same time, the latest figures from the Purple Book show the average recovery plan length is 7.5 years, the lowest period recorded since 2005/06 (when records began).
Commenting on the Purple Book figures, Andy McKinnon, Chief Financial Officer of the PPF says: “It has been another testing year for defined benefit pensions, with a succession of events casting a spotlight on the sector. For schemes and their sponsors, fulfilling past promises, made in a very different environment, has become much more expensive and much more challenging.
“While the landscape remains tough, we are seeing signs of progress. Scheme funding, while volatile, continues to show signs of improvement. At the same time, companies are taking further measures to reduce risk, both by closing their schemes to future accrual and shifting their asset allocation away from equities and into bonds”.
Hans den Boer, Chief Risk Officer of the PPF adds: “While we welcome efforts to reduce risk and improve scheme funding, we should not lose sight of the challenge ahead. The current economic backdrop, as well as scrutiny faced by the entire industry, suggests conditions will remain tough in 2018.
“While the external environment and universe of schemes we protect continue to present challenges, it has not distracted us from our mission to pay the right people the right amount at the right time. We finished the financial year in a robust position with reserves of £6.1bn and invested assets of almost £30bn. So, while risks remain, we are confident that we are in a good position to manage the uncertainties ahead.”