DB funding pressure rises but scheme closures plateau

The Pension Protection Fund and the Pensions Regulator’s 10th annual Purple Book published last week, which tracks trends across DB schemes, showed a decrease in the equity share of scheme asset allocations to 33 per cent.

This was a fall from 35 per cent the year before and compared with around 60 per cent when the study began in 2006 – a marker of the risk-reducing measures schemes have been making over recent years.

The report, which looks at the scheme returns of 5,945 schemes issued in December 2014 and January 2015, also found equity allocations have become less UK-focused, with 42.2 per cent of average share in UK equities compared with 60.4 per cent in 2008.

Source: Purple Book 2015

This broadly reflects what has been seen elsewhere. In May this year consultancy Mercer’s European Asset Allocation Survey, which looked at 1,100 institutional investors across 14 countries, showed a decrease in equity allocation to 32 per cent of assets in January 2015, from 34 per cent in January 2014.

Roger Mattingly, director at professional trustee company Pan Trustees, said: “The fact they’re becoming more global is not surprising, that’s in a way part of the theme of diversification.”

Despite this, the fall in gilt yields has had a detrimental effect on scheme funding, with the average section 179 funding level falling to 84 per cent as of end-March 2015, down from 97 per cent a year earlier.

Source: Purple Book 2015

Mattingly added: “In terms of the governance of the funds, some of these factors are totally beyond the sponsoring employer and trustees’ control, such as gilt yields.”

Mercer’s Pension Risk Survey this week showed gilt yields are still wreaking havoc on pension funding as the accounting deficit for FTSE 350 schemes reached £79bn on November 30 2015, up from £63bn at the end of October 2015.

DB schemes have been closing to new members and future accrual at a steady rate in recent years, but the Purple Book showed a tailing off of scheme closures, with the proportion of schemes open to new members remaining steady since last year. 

Source: Purple Book 2015

However, Lynda Whitney partner at consultancy Aon Hewitt, warned schemes not to view the DB environment as stable, with the end of contracting-out and the possibility of a reform to pension tax on the horizon.

She said: “What we’re seeing is how many [schemes] are closing to future accrual.”

Watch the PPF's chief financial officer Andy McKinnon discuss the findings in depth