Scheme funding levels drop as DB universe continues to shrink

Defined benefit (DB) scheme funding levels fell to an average of 94.9 per cent, as of March 2020, from an average of 99.2 per cent 12 months prior, the Pension Protection Fund’s (PPF’s) latest Purple Book has revealed.

The decline in the aggregate funding ratio was attributed to market movements, primarily due to lower gilt yields driving up liability values and decreases in equity values.

The aggregate deficit increased from £12.7bn to £90.7bn during the same period.

Nearly two-thirds (63 per cent) of schemes were in deficit with an aggregate deficit of £229bn, up from £160bn in March 2019.

The aggregate surplus of schemes in surplus fell from £147bn to £138bn.

Dalriada Trustees professional trustee, Adrian Kennett, stated: “In terms of funding, the fact that the effective date is 31 March 2020 is key. Funding levels were down at that point - if the data was cut today it would show a different story. But that different story of funding improvement would mask scheme-specific challenges, particularly as we have seen in recent days in sectors such as retail.”

The Purple Book showed that the DB universe continued to shrink, with the number of eligible schemes decreasing to 5,327 in 2020 from 5,436 in 2019 and 7,751 in 2006.

Membership of DB schemes also fell, to 9.9 million from 10.1 million members in 2019 and 14 million members in 2006.

Of the 9.9 million DB scheme members in March 2020, 43 per cent were pensioner members, 46 per cent were deferred members and 11 per cent were active.

The proportion of schemes closed to all benefit accrual increased from 44 per cent to 46 per cent over the year, while the proportion of schemes open to new members remained at 11 per cent.

Schemes with more than 5,000 members made up almost 75 per cent of each of total assets, liabilities and members, while only forming 7 per cent of the total number of schemes in the dataset.

Schemes with fewer than 1,000 members made up 80 per cent of the total number of schemes but only around 10 per cent of total assets, liabilities and members.

Investments in equities declined over the year, from 24 per cent to 20.4 per cent, as the value of equities fell, while bond investments increased from 62.8 per cent to 69.2 per cent.

Within bonds, the proportions held were broadly unchanged from last year, with index-linked bonds making up the biggest proportion at 46.1 per cent. Corporate bonds accounted for 28 per cent and government fixed interest bonds contributed 25.9 per cent of the total.

Commenting on the findings, PPF chief risk officer, Stephen Wilcox, said: “The latest edition of The Purple Book shows that DB pension schemes have continued to de-risk their investments, and while the aggregate deficit of underfunded schemes was shrinking, this has reversed due to market movements caused by the Covid-19 pandemic. It also shows that the downward trend in the number of schemes and members continues to.”

In the year to 31 March 2020, 41 new schemes entered PPF assessment up from 26 new schemes in 2018/19.

However, 2019/20’s number of new schemes entering the PPF was similar to the levels observed in each of the four years up to 31 March 2018, but lower than the levels seen before this.

The total value of liabilities in PPF assessment increased from £11.2bn to £13.6bn.

The total value of 2019/20’s claims was £500m, lower than the previous year’s record claims of £1.9bn, although 2018/19’s level of claims was dominated by a large claim from the Kodak Pension Plan No. 2.

In the year to 31 March 2020, the PPF made compensation payments of £860m compared with £775m in the previous year, while records of members receiving compensation increased to 169,861.

The average annual payment per record to members receiving PPF compensation was £4,588, up from £4,382 in 2018/19.

The levy total remained at £564m and the top 100 levy payers accounted for 51 per cent of the total levy, a similar level to the previous year.

Just over a quarter (28 per cent) of schemes had no risk-based levy, while 3 per cent saw the cap of 0.75 per cent of smoothed liabilities apply to their risk-based levy.

“Our role is to manage funding prudently and to manage our balance sheet effectively. Over the last 15 years we have improved our ability to do so and our understanding of our risks,” commented PPF chief finance officer and chief actuary, Lisa McCrory.

“To this end, we are preparing for a complete review of our funding strategy next year, as set out in our Strategic Plan.

“Our new long-term risk model allows us to improve how we manage and approach our balance sheet risk. The assumptions we build in to our modelling work are regularly updated to reflect changes in prevailing economic conditions, including the expected impact from Covid-19 insolvencies which shows the risk from new claims has increased. However, we remain on a strong footing to continue protecting the UK DB pensions universe.”

PPF’s most recent annual report revealed that its probability of success of being at least 110 per cent funded by 2030 fell from 89 per cent to 83 per cent year-on-year, as of 31 March 2020, its lowest level since 2010.

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