The Pension Protection Fund (PPF) has highlighted the significant risk in the DB pension universe in the 2017/18 financial year, despite an increase in the aggregate funding level in DB schemes.
In its 13th edition of The Purple Book, the PPF revealed that the aggregate funding level of DB schemes had risen by 5.2 percentage points to 95.7 per cent, the highest level since 2014.
Improvements in final salary scheme funding are due to higher gilt yields driving down liability values, 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.
PPF chief financial officer, Andy McKinnon commented: “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 means companies should continue to take steps to de-risk their schemes.”
There has been a continuation of de-risking trends, with the proportion of equities held decreasing and bonds increasing. Within equities, there has also been a shift in the share of UK quoted equities which have decreased to 18.6 per cent, from 20.5 per cent, while exposure to overseas equities has increased.
The PPF also found that nearly two-thirds of schemes remained in deficit and have a combined total deficit of £188bn.
Furthermore, the average recovery plan length has remained high at 7.8 years.
The Purple Book revealed that there were the highest number of DB pension transfers since the introduction of pension freedoms, amounting to £10.6bn in Q1 2018.
Although the number of DB pension transfers have increased, it remains relatively small as the pensions universe has liabilities totalling around £1.6trn.
The data revealed that the proportion of workplace DB schemes open to new members has stayed steady at 12 per cent, but the number of PPF eligible DB schemes has decreased from 5,588 schemes in 2017 to 5,450 in 2018.
Large company schemes with over 5,000 members makeup only seven per cent of the total number of schemes in The Purple Book 2018 dataset, but represent almost 75 per cent of total assets, liabilities and members.
PPF chief risk officer, Stephen Wilcox said: “The data in the Purple Book is vital for helping us understand the risks the PPF faces.
Our obligation to members is 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.”
“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.”