When no news is good news! DB pension funds continue to look healthy

What is a pension fund but a long-term investment in our and our children’s later life? Why should we concern ourselves with short-term issues like quantitative easing or Donald Trump’s electoral success when we are planning deep into this century – if not the next?

The answer to that question derives from a misguided assumption that we would be better off not funding for our futures as the sky might fall on our heads.

A simple man can see two possibilities for the future

  1. The world will crumble and mankind regress into perpetual poverty
  2. The world will continue to progress with considerable benefit for all of us.

To be frank, just why we came to the conclusion that we could not afford to properly fund a pension system that delivers to most a decent retirement income, is a mystery.

Just what did we think we were going to do with all the money we did not put into our collective future?

Oh I remember! We were going to stick the money under the mattress, and to make doubly sure we were going to borrow a whole lot more security using the derivatives markets so that we could buy-out all those nasty promises we made when we were young!

Well that’s a little like building a nice big house on stilts, climbing in and then pulling up the ladder.

You built it, you use it”,

Except it’s not quite like that, because the bill for your nice house is presented to a whole load of people who can’t make it in

So here’s what we at First Actuarial are saying.

First of all, the pensions that we are paying and those we are promising to pay, are affordable as the bill to the next generation does not have to be met in the next couple of years.

Secondly, if we give ourselves longer to pay our pension bills – we can ease the pain by allowing the investments (and not employer’s cash-flow), to do the work.

Thirdly, by “investment”, we mean investing in real things that are really needed, including companies that can create much needed jobs, infrastructure so the holes in the road get mended and in the kind of affordable housing that seems a distant memory to many of us.

We want pension funds to invest to capture the real growth that we expect in our economy over time, ironically, part of that growth will be created by the investment of pension funds in real assets! This pleasing circularity is of course a result of thinking positively about the future.

Well here I am in danger of having a go at bean counters, so I’ll tread softly. But the truth is that when we stopped planning for the future (using actuarial science) and started worrying about risk (marked to market accounting), we switched off our smiles and switched on our scowls!

The argument went that we should consider pension funds like bonds – debts to be repaid. This seems ok until you think of that house built on stilts. Every time you pull up the ladder, you are telling the people to pay your debt without giving them the future benefit of living in the house!

Do we really think that the slow but steady improvement in living standards that started around BC15,000 and has been going on until around AD 2000, has come to an end? Are dinosaurs about to rule the world again? Should we be building another Noah’s Ark in readiness of another flood? What in heaven’s name is stopping us being bolder about our futures?

All of which is a  preamble to First Actuarial’s second edition of its “Best-estimates” index (FABI to you and me). Here’s what my good friend Rob Hammond has got to tell the world; and – as you’d expect – it comes with a good news story!




Despite all the noise, October was another month where nothing much happened


The First Actuarial Best-estimate Index (“FABI” for short) fell slightly over the month to 31 October 2016. But, the FABI continues to show that the UK’s 6,000 defined benefit (“DB”) pension funds still have a healthy surplus of £306bn.


The slight fall in FABI is due to an increase in expected future inflation coupled with a reduction in the market value of fund assets (largely due to rising gilt yields).

In contrast, the PPF 7800 index deficit fell over the month largely because it is calculated using the returns on gilt yields, regardless of how the pension funds are actually invested.

Analysis by First Actuarial also shows that an overall investment return of only 3.1% pa is required for the UK’s 6,000 DB pension funds to be 100% fully-funded on a best-estimate basis, the so called ‘breakeven’ investment return.

FAB Index Assets Liabilities Surplus Funding Ratio
31 October 2016 £1,438bn £1,132bn £306bn 127%
30 September 2016 £1,450bn £1,092bn £358bn 133%



The assumptions underlying these results are as follows:

Assumptions Expected future inflation (RPI) Expected future inflation (CPI) Weighted-average investment return “Breakeven” investment return
31 October 2016 3.8% pa 2.8% pa 4.4% pa 3.1% pa
30 September 2016 3.4% pa 2.4% pa 4.4% pa 2.8% pa

Rob Hammond, Partner at First Actuarial said:

“It is not surprising that an increase in expected future inflation, and the knock-on effect that a rise in gilt yields has on the market values of the bonds held by the UK’s defined benefit pension funds, has resulted in a reduction in the best-estimate funding position. However, as the long-term future investment returns underlying the FAB Index have remained fairly stable over the month, the reduction is small.

“Our analysis shows that a long-term investment return of only 3.1% pa is required to achieve a best-estimate funding position of 100%. This ‘breakeven’ investment return is equivalent to only -0.7% pa in real terms, which is by no means an unrealistic expectation for future growth.”

FABI will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension funds.


Notes to editors

The FAB Index (FABI) is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,945 UK DB pension funds on a section 179 basis, together with data taken from The Purple Book, jointly published by the PPF and the Pensions Regulator.

Rob Hammond is available for interview. Please contact:

Rob Hammond on 0161 868 1320 or rob.hammond@firstactuarial.co.uk, or Jane Douglas on 0161 348 7933 or jane.douglas@firstactuarial.co.uk.

About First Actuarial

First Actuarial is a consultancy providing pension scheme administration, actuarial and consultancy services to a wide range of clients across the UK.

We advise a mixture of open and closed defined benefit schemes with our clients concentrated in the small to medium end of the pension scheme market. Our clients range across a number of sectors including manufacturing, financial services, not for profit organisations and those providing services previously in the public sector.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to When no news is good news! DB pension funds continue to look healthy

  1. Gerry Flynn says:

    I tell you what happened, the “free marketeers, neocons and the stand on your own two feet” preachers arrived. Profit before people, short terminisim, instant gratification became the new mantra and we are now paying the price for this dogma.

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