The average recovery plan length for UK defined benefit pension schemes has fallen to its lowest level since 2005/06, the Pension Protection Fund has reported.

According to the PPF’s Purple Book 2017, launched today, the recovery plan length for private DB schemes has dropped to 7.5 years, the lowest period recorded since records began in 2005/06.

Commenting on the findings during a PPF webcast, PPF chief risk officer Hans den Boer said it is “encouraging to see recovery plan length is below eight years which has been more or less constant in the years before this”.

Considering DB scheme funding, the twelfth edition of the report highlighted that scheme funding in 2017 rose to the highest level in three years. On a s179 basis, the funding level was 90.5 per cent in the year to the end of March 2017. This increased from 85.8 per cent during the same period in 2016. The aggregate DB deficit also fell to £161.8bn from £221.7bn a year earlier.

Scheme sponsors made continued deficit reduction contributions in the year to 31 March 2017. According to statistics from the ONS, during the period sponsoring employers made £11.4bn in special contributions in comparison to £16.3nm in the year to March 2016.

With this, the number of DB schemes currently open to new members has seen a decrease from 43 per cent in 2006 to 12 per cent in 2017. Down from 13 per cent last year. The number of schemes closed to future accruals, on the other hand, has risen to 39 per cent in 2017, up from 35 per cent in 2016.

The number of active members in private DB schemes fell from 3.6m in 2006 to 1.3m in 2017.

In terms of DB scheme investments, the aggregate proportion of schemes’ assets invested in equities showed a drop from 61 per cent in 2006 to 29 per cent in 2017. Schemes moved even further from UK quoted equities to just six per cent.

On the contrary, the proportion invested in bonds rose from 28 per cent in 2006 to 56 per cent in 2017. This is a sign that as schemes mature they are more likely to hedge, PPF noted.

Additionally, the percentage invested in assets other than equities and bonds rose to 15 per cent in 2017 from 11 per cent in 2006.

Annual compensation paid by the PPF rose from £1m in 2006 to £661m in 2016/17.

PPF chief financial officer Andy McKinnon commented: “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”.

Nonetheless, den Boer warned that “we should not lose sight of the challenge ahead.” He explained that “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.”

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