The Government’s just published its green paper ‘Security and Sustainability in Defined Benefit Pension Schemes’. It’s already generated knee-jerk headlines claiming 11m employees could see their pensions cut.
The green paper refers to “under-funded schemes” and “stressed employers”, but can’t tell us what “under-funded” means or who the “stressed employers” are and where to find them – this is FAKE NEWS.
First Actuarial has published its FAB Index at 31 January 2017, showing another healthy surplus of £275bn across the 6,000 UK defined benefit schemes. First Actuarial’s Rob Hammond suggests:
“We need to work out what we mean a “stressed” employer or an “under-funded” pension scheme. Loose talk costs pension rights; the DWP estimates that switching our private schemes from RPI to CPI costs ordinary members £90bn. That’s a lot of stressed pensioners! It’s time to calm down and take comfort from our FAB Index.”
“It’s good to see the Government challenging pension schemes to invest more productively. Trustees need to be aware of the best-estimate position of their scheme when assessing what prudence to add for funding purposes. The best-estimate position should reflect the expected return on the assets they actually hold, so if they are holding growth assets, trustees should be able to take credit for this.”
Over the month to 31 January 2017, the FAB Index was stable with the UK’s 6,000 defined benefit (DB) pension schemes maintaining a healthy overall surplus of £275bn.
In contrast, the PPF 7800 index continued its up-down-up-down motion, with the deficit falling by 12% in January 2017 from £224bn to £195bn, having increased by 15% in the previous month (and fallen by 40% in the month before that).
These are the underlying numbers used to calculate the FAB Index.
The overall investment return required for the UK’s 6,000 DB pension schemes to be 100% fully-funded on a best-estimate basis – the so called ‘breakeven’ (real) investment return – has remained at around inflation minus 0.6 % pa.
|FAB Index over the last 3 months||Assets||Liabilities||Surplus||Funding Ratio||‘Breakeven’ (real) investment return|
|31 January 2017||£1,467bn||£1,192bn||£275bn||123%||-0.6% pa|
|31 December 2016||£1,476bn||£1,206bn||£270bn||122%||-0.7% pa|
|30 November 2016||£1,443bn||£1,147bn||£296bn||126%||-0.6% pa|
The assumptions underlying the FAB Index are also consistent:
|Assumptions||Expected future inflation (RPI)||Expected future inflation (CPI)||Weighted-average investment return|
|31 January 2017||3.8% pa||2.8% pa||4.3% pa|
|31 December 2016||3.7% pa||2.7% pa||4.1% pa|
|30 November 2016||3.7% pa||2.7% pa||4.3% pa|
Notes to editors
The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,945 UK DB pension schemes on a section 179 basis, together with data taken from The Purple Book, jointly published by the PPF and the Pensions Regulator.
The FAB Index will be updated on a monthly basis, providing a comparator measure of the financial position of UK DB pension schemes.
Rob Hammond is available for interview. Please contact:
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.