Pensions through the looking glass – the back to front world of the Purple Book!

The 2021 Purple Book , which claims to be the definitie study of the UK’s DB pensions univers risk profile , was putlished last week. Casual readers might expect it to be talking of the “workplace pensions” of the 11m new savers auto-enrolled into retirement saving. They will listen in vain, this is a study of pension schemes that are paying pensions.

So what is the Purple Book talking about. This infographic compares the universe in 2020 and 2021.

Schemes are fewer, members are fewer, less more money’s in bonds, less money’s in equities, more schemes are closed to future accrual, the probability of the PPF being a success is up and the liabilities or schemes in the PPF assessment are down. The uniform picture is of a DB universe retreating fast into a blak hole of nothingness. We should be able to say , at least for the private sector, that DB will very soon , cease to be a problem.

Try selling that to members of the USS, whose pension scheme was valued at the lowest of  2020 levels and whose future benefits are being cut to ensure that the scheme can remain mostly in bonds , as all good DB schemes should be.

Try selling that to Rishi Sunak , who has called on pension schemes to spark Britain’s investment big bang. Last year, not only did DB pensions reduce allocations to equities to 19% but of  that 19% they reduced alloocation to UK equities from  a meagre 13.3% to a tiny 11.6%. That makes the amount DB pension funds are allocating to UK equities around 2% of funds they own. Allocations to corporate bonds are static at 28%, the only areas of growth is in Government Index Linked Bonds. The DB universe is not building back Britain, it is recycling tax-payer’s money.

Try selling that to Britain’s corporate enterprises who last year paid a whopping £12.2bn in deficit reductions to push scheme funding levels into notional surplus. That was money that could have been creating jobs, funding research and sponsoring the innovation we hear so much of from Government (but see so little of relative our overseas competitors). It is heartening to hear that in ten years time, the PPF expects deficit contributions to fall to £800m by 2031, but in the meantime , the PPF collected levies from corporate Britain of £630m lst year, up from £564m. Is it any wonder that UK equities lag relative to other markets, they carry the heavy chains of pensions and a chain and ball called “de-risking”.

Try selling that to deaf children and their parents who are watching the John Townend Pension Scheme use the proceeds from the sale of the charity’s school buildings  to pay better pensions than the PPF. While the PPF moves towards certain success, it cannot assist the John Townend Scheme to pay full benefits but must watch as millions are spent on private insurance with Legal  & General, unecessary trustee and advisory fees and only the slightest value for all the money spent.

The opportunity cost is writ large over the two pictures below.

The human cost of our fanatic adherence to the laws of financial economics are unknown, because they exist in the possibilities that we never explored.  The opportunity cost of pension de-risking is beyond the scope of the Purple Book.

Counter-intuitive to a DC saver

This is not to denigrate the book, which is a source book for information on how DB pension schemes are valued.  But to the bulk of Britain’s pension savers, the factors that influence the health of our DB pensions are against our common sense

For instance we learn that

A 0.1 percentage point (10 basis point) rise in both nominal and real gilt yields increases the 31 March 2021 net funding position by £15.3 billion from £46.9 billion to £62.2 billion. While a 2.5 per cent rise in equity prices would improve the net funding position by £9.7 billion.

A 0.1 percentage point (10 basis point) reduction in both nominal and real gilt yields raises aggregate scheme liabilities by 1.9 per cent and raises aggregate scheme assets by 0.9 per cent. A 2.5 per cent increase in equity markets increases scheme assets by 0.6 per cent.

Despite the vitual disappearance of equities from DB asset alocations, the PPF feel there is further hedging to be done.

Lisa McCrory, the PPF’s chief finance officer and chief actuary, said: “While it’s positive to see such an improvement in scheme funding, we’re extremely mindful that this has mainly been driven by market movements and not a proportional increase in scheme derisking.

Not only is that totally contrary to our experience of DC workplace pensions, it seems contrary to financial economics, why are the PPF so worried about changes in the gilt yields when most of the nations DB assets are already fully hedged?

We are told when the stockmarket falls, so do our pensions and to some extent , this is true with DB schemes. But if  the real determinant of success and failure for our pension schemes, (including the PPF), are the tiny changes in the gilt yield, then pension solvency is now controlled by Government economic and fiscal policy.

Ironically, “funded” DB pension schemes are now so inexticably linked to the decisions taken by the Treasury that the Government could buy out most of the liabilities and pay our pensions with little difference to the nation’s balance sheet or P/L. A fully de-risked funded pension univers is  little more than an extension of unfunded public pensions.

All of this , makes no sense at all to DC savers who are investing ever more heavily in highly risky illiquid UK private equity , in global equitiy markets only to tip huge amounts of accumulated gains into cash at retirement – because there is no pension to purchase.

It is as if we have entered a  Looking Glass world .

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Pensions through the looking glass – the back to front world of the Purple Book!

  1. A very timely blog, Henry.

    Lewis Carroll’s Through the Looking-Glass had its origins in tales about the game of chess that Carroll used to tell Alice Liddell and her sisters when they were learning to play the game.

    And I see we’re both taking part with others in Monday afternoon’s “masterclass” called Endgame, Middlegame or Long Game? (The Choices Facing DB Pension Schemes), organised by SG Pensions Enterprise.

  2. henry tapper says:

    Yes Derek, it should be a good afternoon on Monday. It’s well worth applying for a place as I know Stephen Glover is still looking to expand the audience.

    As for the Looking Glass, I sense there is lot of chess playing going on! We have a DB funding code which is looking increasingly obsolete. But the PPF still sees itself as the white knight and the pension regulator is still shouting “off with their heads”,

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