Funding pressures are here to stay for the foreseeable future according to the 2016 edition of Purple Book, so what are possible solutions?

The eleventh edition of the Purple Book showed that trends in defined benefit (DB) pensions have stabilised – in a year where the future of defined benefit pensions has risen up the public agenda.

But despite this, there is still a long way to go. Andrew McKinnon, chief financial officer at the Pension Protection Fund (PPF) said: “2016 has been an interesting year for defined benefit pensions. While scheme funding remained largely stable in the year to March, there have been large swings in funding since June.

”When we look back at what progress schemes have made over the last decade it appears that many schemes are just treading water. The average recovery plan length, at around eight years, has barely improved, which brings home the challenge we now face.”

life ring

The Purple Book data shows that scheme funding changed only slightly in the twelve months to March. The aggregate deficit on an s179 basis fell slightly from £244.2 billion at the end of March 2015 to £221.7 billion at the end of March 2016, while the aggregate funding ratio rose from 84.2 per cent to 85.8 per cent.

The average recovery plan length, at around eight years, has barely improved

However in the period from end-March 2016 to end-August 2016, the scheme funding ratio deteriorated significantly from 85.8 per cent to 78.3 per cent, largely the result of the sharp fall in gilt yields, against which liabilities are measured. This has since gone up, but overall it’s clear to see that scheme funding remains an issue.

Joanne Segars, chief executive of the PLSA spoke of “a sector under pressure” but thought that one way to address the issue of underfunding could be consolidation to make DB schemes more sustainable by dealing with cost efficiencies.

Segars was quick to point out that this wouldn’t solve the issue overnight, but that it could certainly help. She said: “I think it is important we do tackle these issues, not just think, ‘DB is on its way out, so let’s just let it die in the corner somewhere’.”

Steve Webb, director of policy and external communications at Royal London had other ideas. He felt that partial transfers-out would be a win-win for both members and schemes: “Perhaps we need to think a bit more creatively around pension freedoms: did pension freedoms make these [transfer] numbers change dramatically? Not yet. But should they have done, could they have done? I think probably yes.”

Conditions will remain tough in 2017

McKinnon concluded that the year ahead will be challenging for DB schemes. He said: “The current economic backdrop, as well as scrutiny faced by the entire industry, suggests conditions will remain tough in 2017. 

“The Purple Book 2016 highlights the necessity of effective risk management and reaffirms the importance of the PPF safety net for members of schemes that fail to pay what they promised.”

The Purple Book, published by the PPF, covers the 5,794 DB pension schemes the PPF protects. The majority of the data is based on information that eligible DB schemes are obliged to provide to the Pensions Regulator, and cover the 12 months from 1 April 2015 – 31 March 2016.