Rather than kick off with the FAB index this month, I thought to promote the response it’s publication this morning has received.
Lewis
On the one hand there is Paul Lewis, who (for me) stands for common sense and the ordinary person.
On the other hand there is John Ralfe, who (for me) stands up for neo-liberal economics and “risk-free pensions”.
Ralfe
There is here a polarity of opinions that pretty well defines the debate on pension affordability, it touches on the way that schemes like Royal Mail, USS are organised and the benefits they provide.
These figures are entirely fictitious & ignore the market values of pension liabilities & assets. I might as well say my mortgage is “really” only £80k because I own some equities. https://t.co/jDv2NtVHVp
— John Ralfe (@JohnRalfe1) June 17, 2018
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If this presents the argument at its most polarised, here are the fifty shades of irritation that follow in its wake.
This is just one measure. There are many others with a different view.
Picture here courtesy of @PPJamesPhillips pic.twitter.com/egmThAaVsS— David Brooks (@PensionsDave) June 17, 2018
and
Perhaps it’s the volatility that comes with scheme funding that businesses want to avoid. Certainty counts for a lot.
— Anthony Morrow (@evestoranthony) June 17, 2018
and
the index is a nonsense, there is no “healthy surplus” in DB funds. Here @FirstActuarial themselves explain why it is silly https://t.co/8NERLVm17f
— Sam Pickford (@pickfos) June 17, 2018
and
Now for that ice cream I promised,
Try and savour the brief reprieve.https://t.co/Jh16oWyMCo— victoria milner (@ToryanaMilner) June 17, 2018
and
Is that your bank statement ?
— Man holding a baguette (@The_Human_Race1) June 17, 2018
So after all that – here is the First Actuarial FAB index for May
Over the month to 31 May 2018, First Actuarial’s Best estimate (FAB) Index improved, with the surplus in the UK’s 6,000 defined benefit (DB) pension schemes increasing from £361bn to £379bn.
The deficit on the PPF 7800 Index deteriorated over May 2018 from £81.7bn to £94.0bn.
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 May 2018 | £1,611bn | £1,232bn | £379bn | 131% | -0.9% pa |
| 30 April 2018 | £1,577bn | £1,216bn | £361bn | 130% | -0.8% pa |
| 31 March 2018 | £1,566bn | £1,215bn | £351bn | 129% | -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 fallen to minus 0.9% pa. That means the schemes need an overall actual (nominal) return of 2.6% 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 May 2018 | 3.5% pa | 2.5% pa | 4.0% pa |
| 30 April 2018 | 3.5% pa | 2.5% pa | 4.1% pa |
| 31 March 2018 | 3.5% pa | 2.5% pa | 4.1% pa |
The FAB Index is calculated using publicly available data underlying the PPF 7800 Index which aggregates the funding position of 5,588 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.
#FABI
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.
The FABI may show an estimate of how much “prudence” is in the other measures (such as in the James Phillips chart).
Should prudence be constant, or variable over the cycle? I tend to see prudence as being countercylical – we need more when markets are bubbling up, and less when they’re falling down.
That’s a great observation – where in the cycle do you think we are George?
Expected returns would suggest we’re nearer the top in all of equities, rental properties and bonds, if the next five to seven years are expecting to see lower returns and higher interest rates.
That’s easy to say, less easy to execute.
There will be equities which can grow earnings from here, existing properties which can be re-rated upwards in terms of rents and capital values, but it’s harder to see the case for bonds when gilts are near the floor and corporate bond margins above are relatively low.
So, there’s a case for more prudence now than before, but not necessarily as much prudence as the Pensions Regulator seems to be asserting, while AA-bond accounting rates seem to be overstating long-term liability costs.