Every December the Pension Protection Fund publishes its “Purple Book”, which gives an overview of the UK’s defined benefit pension schemes using data collected over the year. Highlights from the 2018 edition include:
1. The number of active members in DB schemes is levelling off
There are now just 1.3 million active DB scheme members, compared to 3.6 million in 2006. The proportion of schemes with active members has remained fairly stable over the last couple of years at 58%, although only 12% of schemes allow new members to join.
The proportion of schemes open to new members has declined in most years since the Pension Protection Fund started using data recorded by the Pensions Regulator in 2006. However, the decline in open schemes looks to be levelling off and the figures are supported by some very large schemes that still allow active membership.
2. Funding levels are improving
Funding levels improved by around 5% over the year to 31 March 2018, on top of an improvement of around 5% over the previous year. Funding levels are now close to their recent high-point of 2014.
Strong investment returns have improved the funding levels of many schemes, tempered by somewhat volatile gilt yields. Schemes heavily invested in equities have seen the strongest investment returns over the year, particularly from overseas assets as the value of Sterling has fallen.
3. Recovery plans remain around eight years on average
The average recovery plan period agreed during the year was 7.8 years. This is similar to the average length of 7.5 years in 2017 and 8.0 years in 2016.
Shorter recovery plan lengths broadly reflect improvements in scheme funding and suggest that employers are using these improvements to clear deficits more quickly rather than simply to pay less.
4. Schemes continue to move into lower risk assets
The average proportion of assets schemes hold in equities has more than halved since 2006 and now stands at 27%. Over the same period, the proportion invested in gilts has doubled, with more complex investment strategies such as LDI also gaining popularity.
Most defined benefit pension schemes are maturing as members age and no new members join. This is accompanied by a move into lower risk assets, but the supply of gilts in the market is limited. This pushes prices up and makes moving into gilts more expensive. Some schemes are now removing the link between scheme funding and gilts, instead basing their funding on inflation or expected asset returns.
The Purple Book 2018 can be found here.
Simon Hubbard, Senior Consultant and Actuary