Gill Wadsworth examines the effects of the recession on derisked DB
Ten years ago the Pension Protection Fund (PPF) published The Purple Book for the first time, offering a thorough health check of the nation’s defined benefit schemes.
Pre-dating the global financial crisis by two years, the initial publication shows as many as 43% of DB schemes were still open to new members, while average asset allocations to equities sat at a staggering 61.1%.
Fast forward to today and the fallout from the dire economic conditions since 2008 are clear.
The 2015 Purple Book shows just 13% of DB schemes are still accepting future accruals, while equity allocations have fallen to 33%.
Employers have ploughed £120bn into their DB schemes over the past decade, and the PPF stats show a clear desire by sponsors to end this considerable financial drain.
£105bn of DB assets have been shipped off to the insurance sector as part of risk transfer deals, while scheme sponsors have increased allocations to fixed income by 19.4 percentage points.
But what has all this greater attention to risk management achieved?
As at 31 March 2015, the aggregate s179 funding position of the schemes covered by the Purple Book was a deficit of £244.2bn. This is the largest deficit at an end March date since the PPF was established in 2004, and may come as something as an upset for those employers who have parted with millions of pounds in additional contributions.
However, Gavin Markham, partner at consultant Barnett Waddingham, says that while a solvency ratio of 84% is far from palatable, the figures could have been much harder to stomach.
He adds: “If it hadn’t been for the derisking activity people had taken already the [funding] position could be a whole lot worse.”
He adds: “Some of our clients significantly derisked over the last five to ten years and ultimately transitioned to an insurance company. They did that without any additional contributions because they derisked early and the deterioration in market conditions hasn’t adversely affected them. Those schemes that are only partially derisked are still impacted.”
While the last 10 years has been turbulent, there is no sign of calmer times ahead. The government is still consulting on whether to change the tax regime governing pensions, with the possibility that exemptions on contributions could be removed.
Lynda Whitney, partner at Aon Hewitt, says:“[There is] the potential for a major tax change for pensions in the Budget 201,which could again send a seismic shock through the industry and lead to further massive change.”
With so much uncertainty it is hard for trustees and scheme sponsors to plan for the next six months never mind the next decade, but those that are able to move quickly will – as ever – be best rewarded.