This blog has been sent me by Con Keating and is published on his behalf. Thanks to both him and Alastair

In the run-up to Christmas Alastair Meeks of Zedra wrote three short thought-piece blogs on the future of private sector DB schemes in the UK (here , here and here); this is a response to some of the ideas contained in those blogs. The idea, on which all that follows in those blogs, is based on the assumption that the funding shortfalls seen over the past two decades in these schemes have been solved.

He states:

“ As at March 2023, UK defined benefit schemes had a combined £1.371 trillion in assets. Their combined PPF liability value was just £929 billion. So, there was a surplus on a PPF basis of £441 billion.”

These are in fact the PPF 7800 index figures for November 2023.  The March 2023 Purple Book figures, from which these are derived using a ‘roll-forward’ method, were: Assets £1,404.4 and Liabilities £1,045.5 for a surplus of £358.9. These are based on TPR’s latest data. It should be noted that the PPF 7800 index estimates for March 2023 were: Assets £1439.8 and Liabilities £1.080.5 for a similar surplus of £359.3.

However, the Purple Book’s data is stale, and captures almost none of the developments in 2022, Table 2.4 of the Purple Book makes this clear:

This is also made much more explicitly clear in Oliver Morley’s (CEO PPF) recent letter to Work and Pensions Committee.

The Office for National Statistics conducts quarterly surveys of the assets held by schemes; their estimate of assets is £1,244 billion – that is £196 billion less than the PPF estimate. If the ONS is correct, and the Purple Book liability values are correct, then the surplus reduces to £143 billion.

The ONS is expected to publish liability values for the four quarters of 2022 shortly.

If we consider the responses in the Purple Book dataset to be representative of the current situation prevailing in March 2023, of which there are just 15 with assets of £6.8 billion, then the aggregate asset estimate would be £1,259 billion – that is within the statistical bounds of the ONS estimate of £1,244 billion.

The first blog states:

“And those numbers don’t take into account the schemes that have already been bought out. Cumulatively, more than £200 billion of pension scheme liabilities have been secured with insurers. That number could triple in the coming years.”

The Purple Book shows (based on data supplied by Hymans Robertson) total buy-in and buy-out activity of £231 billion between 2013 and the first half of 2023; of this just £79 billion was buy-out. It is notable that schemes in wind-up increased by 1% in the year to March 2023, but these schemes account only for £15.2 billion of assets and £12.0 billion of liabilities. The £152 billion of buy-ins do, in fact, appear within the asset estimates of the PPF and ONS. It should be noted that these insurance policies have a value of £117 billion in the ONS survey figures; this decline is a combination of pensions paid and the discount rates applicable.

One of the more problematic figures in the Purple Book is the estimate of buy-out liabilities – which it has declining by 40% in the year, from £2,105.3 to £1,254.8.

With the ONS asset estimate, this would be a funding ratio of 99.2%.

The first blog ends with

“Such a gushing cataract of money needs to be channelled so that it flows safely and its power is harnessed constructively.”.

However, this fails to recognise that any surplus is just an artefact of the accounting convention; there is no new money. Indeed, the monetary value of the assets held by schemes declined by some £400 billion by PPF estimation and £600 billion by the ONS over the year. It is of course, already invested.

There is also no recognition of the approximately £300 billion of additional contributions made by sponsors since the foundation of the PPF, of which £252 billion were explicit deficit repair contributions – and to add a sense of the significance of that; it is some 10% – 15% of UK non-financial private sector net capital resources.

If the ambition is ‘productive investment’, it  seems to me that the place to start is with refunds to those who made these deficit repair contributions – perhaps that will relieve the strains they put on corporate business investment.