Sara Protheroe, chief customer officer at the Pension Protection Fund (PPF), has warned IFAs not to use defined benefit (DB) deficits to encourage DB transfers , a message echoing First Actuarial’s repeated calls to the industry to present a balanced view.
“At the end of October the aggregate [PPF] shortfall was just under £150 billion, down from the peak of over £400 billion at the end of August 2016. On average schemes are planning to take seven and a half years to close those shortfalls. In general we believe that is affordable and realistc. Most employers with DB schemes will remain in business, and gradually eliminate their deficits. While they do so, they will continue to pay full benefits to scheme members.”
This echoes the message coming out of First Actuarial’s Best estimate (FAB) Index, which confirmed that the best estimate position of the UK’s 6,000 DB pension schemes remained stable over October, showing another month-end surplus of £316bn, and a steady 126% funding ratio.
First Actuarial Partner Rob Hammond said:
“We produced the FAB Index with the purpose of giving Trustees, employers and members, both sides of the story so that they could properly assess the amount of prudence being used in scheme funding.
“Another purpose was to counter the persistently negative headlines on pension scheme deficits that, in the wrong hands, could scare members into making bad decisions.
“Sara rightly defends the PPF as providing good quality protection for the 11 million members who participate in a defined benefit pension scheme, and it is welcome to hear somebody else who shares our concerns on deficit scaremongering.”
The technical bit…
Over the month to 31 October 2017, the FAB Index did not move, with the surplus in the UK’s 6,000 defined benefit (DB) pension schemes remaining at £316bn.
The deficit on the PPF 7800 Index improved over October from £158.0bn to £149.8bn.
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 October 2017||£1,543bn||£1,227bn||£316bn||126%||-0.7% pa|
|30 September 2017||£1,524bn||£1,208bn||£316bn||126%||-0.7% pa|
|31 August 2017||£1,553bn||£1,237bn||£316bn||126%||-0.8% 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 remained at around minus 0.7% pa. That means the schemes need an overall actual (nominal) return of 2.9% pa for the assets to meet the liabilities.
The assumptions underlying the FAB Index are shown below:
|Assumptions||Expected future inflation (RPI)||Expected future inflation (CPI)||Weighted-average investment return|
|31 October 2017||3.6% pa||2.6% pa||4.2% pa|
|30 September 2017||3.6% pa||2.6% pa||4.2% pa|
|31 August 2017||3.6% pa||2.6% pa||4.0% 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 is 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, investment 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.