The New Year presents us with an opportunity to look back on what has been achieved to date, but more importantly to consider what lies ahead.
In December the Pension Protection Fund (PPF) published its 16th edition of its annual reflection of The Pensions Universe Risk Profile (more commonly known as the Purple Book). The report provides an overview of the UK defined benefit (DB) pension landscape and is a useful tool for analysing trends across a broad spectrum of metrics relevant to pension schemes.
In this blog we look back on some of the key themes highlighted in the 2021 Purple Book, and ask, what’s next in the UK DB landscape?
Evolving universe and scheme demographics
The dataset underlying the latest Purple Book includes 5,215 DB schemes, covering 9.7 million members. By all respects still a significant “universe”. However, the chart below shows how scheme numbers have continued to shrink in recent years. The latest report indicates a 20% reduction in the number of schemes over the past decade.
Source: Purple Book 2021, chapter 2
The declining universe is driven by schemes winding up, scheme mergers, and schemes entering PPF assessment, with few (if any) new DB schemes being created to combat this decline.
Compared to the previous year, the proportion of schemes open to new members remained unchanged at 11%. However, the proportion of schemes closed to new members but open to future benefit accrual reduced from 41% to 39%. This is typically linked to scheme size, with over 50% of schemes having at least 10,000 members sitting in this category.
Looking forward, we’d expect this trend of scheme numbers falling and schemes closing to future benefit accrual to continue as employers seek to manage both the risks and costs arising from DB benefit accrual and focus their resources elsewhere.
The Purple Book also shows that the number of active DB members has fallen to just under one million for the first time – representing just over a quarter of those found in the first Purple Book dataset in 2006. This is in stark contrast to the vast increases in defined contribution (DC) membership observed over that period, predominantly resulting from the success of Auto Enrolment.
For many employers, offering a DB pension remains an important component of their overall benefits package. But given the low proportion of schemes remaining open to new members, future continued reductions in overall active DB membership appear inevitable.
It will be interesting to see if there are any developments on alternative pension arrangements in 2022. One particular example is Collective Defined Contribution (CDC) schemes – we expect draft regulations to be introduced later this year, and so this area may become an increasingly important part of the pension landscape in 2022 and beyond.
Development of funding position
The aggregate PPF s179 funding position of all schemes in the PPF universe increased from 95% to 103% over the year, with a net funding position of a £47 billion surplus (at 31 March 2021 based on PPF s179 assumptions).
Source: Purple Book 2021, chapter 4
The PPF notes that the increase is predominantly down to the impact of market movements, arising due to large increases in equity values and gilt yields over the year. Clearly there will have been significant variation within schemes depending on their investment portfolio and specific circumstances.
The funding position has further improved since the effective date of the Purple Book analysis, with the aggregate surplus estimated to have increased to £129 billion by the end of December 2021, representing a funding ratio of 108%. However, many schemes still have a significant gap to bridge to reach full buyout funding, with the aggregate estimated full buyout funding level at 74% (significantly lower than the figures above - representing the difference between the level of PPF compensation and scheme benefits). For schemes with buyout as their end-goal, the future is likely to hold continued calls for sponsor contributions to pave that journey.
Schemes continue to de-risk through increasing their asset allocations to bond assets, the latest year seeing a 3% increase to 72% in the overall weighted average bond allocation. It is worth highlighting that schemes with equity holdings are likely to have seen significant increases in the value of these assets in the year to 31 March 2021 following the strong growth in these markets.
Source: Purple Book 2021, chapter 7
Another important part of the pensions landscape is the growth in the transfer of liabilities to insurers. The total level of risk transfer business covering buyouts, buy-ins and longevity swaps has been significantly larger in the past five years compared to levels prior to then. Buy-in and buy-out volumes exceeded £30 billion in 2020, and whilst 2021 saw a slower start (with around £7 billion completed in the first half of 2021), a flurry of transactions was completed in the second half of the year, meaning that transaction volumes have remained high.
The Pensions Regulator has recently approved Clara as an assessed DB superfund, which is expected to provide opportunities for a greater number of schemes to pursue a risk-reduction strategy of this form. Combining this with the requirement for schemes to set long-term objectives under The Pension Scheme Act 2021, we expect the risk-transfer market to continue to grow in future years.
The Purple Book provides a useful annual snapshot of key trends in the UK DB pension landscape. Within the 2021 report this includes:
- the continued contraction of the DB universe as schemes wind-up or transfer to the PPF;
- a persistent trend of schemes closing to new members and future benefit accrual;
- an improvement in aggregate funding levels; and
- asset allocations continuing to develop in favour of de-risking strategies.
Looking ahead, we expect that many of these trends will continue to persist in future years, as schemes and sponsors continue to prioritise risk reduction and focus on their end goal, which is likely to include a liability transfer for many.