First Actuarial’s Best estimate (FAB) Index improved again in March showing a surplus of £294bn across the 6,000 UK defined benefit schemes.
This continues to buck the trend with the PPF 7800 index falling for the third month in a row, primarily due to its vulnerability to gilt yields, and is in sharp contrast to other pensions stories in the news.
For example, reports of an offer by Tata Steel to make a one-off payment of £520m into its £15bn UK pension scheme – the British Steel Pension Scheme (BSPS) – have been criticised as not going far enough to plug its funding deficit nor sufficiently protecting the Pension Protection Fund, with suggestions that its funding deficit could increase to as much as £2bn at its 2017 actuarial valuation.
First Actuarial have estimated that using assumptions in line with those used for the FAB Index, the BSPS could easily have a surplus of £2bn calculated on a best-estimate basis. Whilst not necessarily suitable for funding purposes, it does demonstrate that more context needs to be given when reporting on the financial position of UK pension schemes.
First Actuarial Partner, Rob Hammond says:
“Press attention continues to focus on the worst-case scenario for pension schemes, sensationalising pension scheme deficits, which does nothing to restore public confidence in pensions.
“This has led to overfunding of pension schemes by pension scheme trustees which is putting excessive pressure on employers, and a sharp increase in members wanting to transfer out of defined benefit pension schemes.
“The FAB Index provides an alternative way of looking at things, which provides trustees, employees and the general public alike, with a more rounded view of the state of their pension scheme, so that decisions can be made from a much more informed position.”
The technical bit…
Over the month to 31 March 2017, the FAB Index improved with the UK’s 6,000 defined benefit (DB) pension schemes increasing their surplus from £288bn to £294bn.
The PPF 7800 index deficit decreased over March from £242.0bn to £226.5bn.
These are the underlying numbers used to calculate the FAB Index.
|FAB Index over the last 3 months||Assets||Liabilities||Surplus||Funding Ratio||‘Breakeven’ (real) investment return|
|31 March 2017||£1,519bn||£1,225bn||£294bn||124%||-0.7% pa|
|28 February 2017||£1,511bn||£1,223bn||£288bn||124%||-0.8% pa|
|31 January 2017||£1,467bn||£1,192bn||£275bn||123%||-0.6% pa|
The overall investment return required for the UK’s 6,000 DB pension schemes to be 100% funded on a best-estimate basis – the so called ‘breakeven’ (real) investment return – has increased to inflation minus 0.7% pa. That is, a nominal rate of just 2.9% pa.
The assumptions underlying the FAB Index are shown below:
|Assumptions||Expected future inflation (RPI)||Expected future inflation (CPI)||Weighted-average investment return|
|31 March 2017||3.6% pa||2.6% pa||4.0% pa|
|28 February 2017||3.7% pa||2.7% pa||4.1% pa|
|31 January 2017||3.8% pa||2.8% pa||4.3% pa|
The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,794 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.