Pension Protection Fund announces much healthier position than last year: Quantum’s thoughts

In it’s latest overview of the UK’s defined benefit (DB) pension scheme sector, The Pension Protection Fund (PPF) has reported a 12% increase in the probability of it being able to pay all benefits due with the assets it holds, plus future returns. The reassuring ‘probability of success’ figure now stands at 95%, up from 83% in 2020.

The announcement was part of the PPF’s annual ‘Purple Book’, which uses data collected over the year to 31 March and identifies trends and developments and forecasts possible implications going forward.

Speaking about the latest report, Simon Hubbard, Senior Consultant and Actuary at Cardiff-based Quantum Advisory, said: “A probability of success of 95% means the PPF is now very close to what we might consider to be ‘fully funded’ for a normal pension scheme. This will be good news for levy-payers because it could mean the PPF has scope to limit levy increases in future years.”

The Purple Book also highlighted the improvement in funding levels due to strong performance of investment markets, with increases of around 8% following last year’s fall. Simon said: “The pandemic and its impact on markets caused a widening gap between schemes with the strongest and weakest funding positions. This was likely driven by the ability of well-funded schemes to protect against market movements through a low-risk investment strategy, meaning that weaker schemes suffered more as markets moved against them. However, strong asset performance has helped more recently for schemes reliant on equities to generate returns.”

The PPF mentioned the escalating practice of moving schemes into lower risk assets, with the average proportion of assets being held in equities now standing at less than 20%, as well as a boost in gilts and complex assets such liability-driven investment strategies.

Simon said: “Most defined benefit pension schemes are maturing as members age and no new members join. This is accompanied by a move into lower risk assets, but the supply of gilts in the market is limited which pushes prices up and makes the aim of moving into gilts more expensive. Some schemes are now removing the link between scheme funding and gilts, instead basing their funding on inflation or expected asset returns.”

The PPF is the statutory fund designed to protect members if their DB pension fund sponsoring employer becomes insolvent and the pension fund does not have enough assets to pay the benefits promised.

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