The PPF’s purple book for 2023 is out.

The PPF tells us

This publication tracks trends in DB scheme funding, demographics, asset allocation, and more. It also gives us, the
PPF, an in-depth understanding of the risks we face from the universe of schemes we protect. Understanding this information helps us to model the level of claims we may need to absorb in years to come, and helps inform decisions on our funding strategy.

It is therefore an important publication and should not be contentious. However, this year it is likely to add fuel to a debate that has been smouldering since the LDI crisis, over a year ago.

There’s no doubt that  the PPF 7800 schemes have better funding position than in previous years, but this blog asks whether the story being told , aligns with what is actually happening. Blindly accepting the PPF’s numbers and narratives may not serve us well over time.

Are schemes really so well funded?

Recent detailed articles, published on on this blog by Con Keating and Iain Clacher ask why the PPF assume the aggregate loss of DB assets in 2022 at £400bn while the ONS report a figure of £600bn. The PPF have been accused of being  “actuarial with the truth”

The Purple Book provides us with a number of detailed breakdowns relating to funding which are at least as doubtful if not more so.

Almost all the data on which the asset distribution is based are pre October 2022 asset valuations. Keating and Clacher‘s analysis suggests that  the crucial issue surround what was sold and what has been bought . Doubts persist over “sampling” of schemes and worries continue that smaller schemes may not be quite as well off as the PPF think. They were least protected when the collateral calls arrived.

The concern is that the methodology used by the PPF is distorting the overall picture.

The PPF tells us that funding ratios used were estimated as at 31 March 2023 and calculated from funding information supplied in scheme returns submitted to The Pensions Regulator (TPR). So the core data will often pre-date the LDI crisis and depends on  a “roll forward”,

Assets are rolled forward according to changes in a small set of market indices, although in many cases more recent (than the s179 valuations) asset splits are taken into account.

The Work and Pensions Committee in parliament has questioned the divergence of PPF from ONS numbers and have pointed out that the ONS are using up to date data from their sample.

I understand that almost all the data on which the asset distribution is based are pre October 2022.  We know that what happened then included a “fire-sale” of certain assets to meet LDI collateral calls. The prices paid to buy and sell assets may not have been in line with “market indices“.

What we are presented with looks a little too good to be true

The basis for this turnaround are changes in bond yields and (to a lesser extent) mortality assumptions. These seem a fragile platform for the radical statements made by these diagrams.

Are we really in the end-game?

While I enjoy the elegant presentation of the turnaround in buy-out liabilities, I am concerned that the PPF’s focus is overly focussed on buy-out

On an estimated full buy-out basis, the net funding position improved to a surplus of £149.5 billion from a deficit of £438.4 billion the year before and the funding ratio improved from 79.2 per cent to 111.9 per cent

For as the PPF go on to acknowledge

There were £44 billion worth of risk transfer deals (buy-ins, buy-outs and longevity swaps) in 2022, a very similar value to the previous year. This is a relatively small amount in the context of the whole universe (my bold)

The end-game may not  be upon us just yet. We are more likely to see a slow run-off of DB liabilities over decades.

Positive changes in bond yields  impact the valuations the PPF’s use to calculate their levies (S179), shape the PPF’s investment strategy and inform upon the mood-music at TPR and the wider pension community. But if they mask a malaise in the asset base, then the Purple Book may be giving us faulty indicators.

We will have to wait till next year’s Purple Book to get the true picture on assets and I suspect it will tell the tale told by the ONS. Maybe one of the reasons we have seen rather fewer buy-outs than these numbers would anticipate, is that due diligence on schemes by insurers  doesn’t paint quite this rosy picture.

Winning badly?

If doubt is cast on the big picture, it tends to linger in examining some of the smaller issues

Some of the charts produced in  the Purple Book look odd. The most obvious oddity is the number of members in the PPF7800 schemes. These are down from 9.6m to 8.9m.

People can leave occupational schemes for a number of reasons including – going into the PPF, voluntary transfer out and bulk buy-out but to lose 500,000 members in a year looks a little more than careless.

We are not seeing people transferring out on a voluntary basis and as we’ve seen , bulk buy-out has yet to have more than a marginal impact. The numbers of schemes going into the PPF assessment (and hence lost to the 7800) is also down.

I hope that death is not the answer, or rather I hope that the numbers are not right. Death is not a de-risker, each pensioner that dies should be mourned not celebrated.