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Purple Book 2014 – de-risking trends continue

Published by Mark Paxton on

The Pensions Regulator and the Pension Protection Fund have released their latest survey of defined benefit (DB) schemes in the UK, known as the Purple Book.

The survey was compiled based on information provided by schemes before 31 March 2014. Key findings were:

  • the estimated number of defined benefit schemes as at March 2014 was 6,070, down from 6,225 as at March 2013 
  • the percentage of schemes still open to new members was 13% in 2014, compared to 36% in 2007
  • 53% of schemes were closed to new members but open to accrual in 2014 while 32% were closed to future accrual, in 2007 45% of schemes were closed to new members but open to accrual and only 16% were closed to future accrual. 
  • in both the 2007 survey and the 2014 survey, 2% of schemes were winding-up

These statistics demonstrate the significant trend that is occurring of schemes closing to new members, ceasing accrual and ultimately winding up. The Purple Book also suggests why schemes are closing to new members and to accrual – the weighted average buy-out funding level for open schemes averaged 63% at March 2014 compared to 69% for schemes closed to new members but open to accrual and 66% for schemes closed to all accrual. Better funding levels will lead to reduced contributions payable by the employer.

While employers with schemes that are closing to accrual or to new members may enjoy the reduction in contributions that result, it may still be desirable to provide an attractive package for their employees. Such employers may wish to consider alternative pension packages such as a shared-risk DB scheme or a collective defined contribution scheme rather than a standard defined contribution arrangement.

The Purple Book also highlights that funding levels for many schemes will have fallen significantly since March 2014 as both equity markets and gilt yields have fallen. These movements will also affect accounting figures – see our previous blog post for more on this.

De-risking

The Purple Book also examines the investment strategy of schemes. The overall holding in equities in the universe of UK DB schemes has fallen from 61.1% in 2006 to 35.0% in 2014 while the holding in gilts and fixed interest assets has risen from 28.3% in 2006 to 44.1% in 2014. Meanwhile, the amount in cash and deposits has risen from 2.3% in 2006 to 6.1% in 2014. The recent announcement by the Federal Reserve that it is ending quantitative easing could increase market volatility so employers may wish to encourage their schemes to ensure that their investment strategies are robust enough to cope.

“£7.6 billion worth of buy-outs or buy-ins were completed in 2013 along with longevity swaps covering £8.8 billion of liabilities.”

Insuring benefits through a buy-out or buy-in policy or implementing a longevity swap have also been popular de-risking methods. According to the Purple Book, £7.6 billion worth of buy-outs or buy-ins were completed in 2013 along with longevity swaps covering £8.8 billion of liabilities. The Purple Book suggests that the average funding level on a full buyout basis has improved to 67% at March 2014 compared to 61% at March 2013. However, the fall in yields since March has increased buyout prices.

PPF levies

The use of contingent assets is also discussed in the report. For many schemes, these can be a useful way to reduce their PPF levy as long as they meet certain requirements. The PPF have been clamping down on the suitability of some of these guarantees (known as 'Type A' guarantees) and this has resulted in a reduced number of these guarantees being accepted by the PPF. This is something for sponsors and trustees to keep in mind for next year.

Summary

The Purple Book is a useful way for employers to see what other schemes are doing and to see if there are any ideas they can employ for their scheme. The latest Book suggests the de-risking trend is continuing – through closure to accrual or to new members, safer investment strategies or through insurance policies or longevity swaps.

About the author

  • Mark Paxton

    Since joining Barnett Waddingham in 2001, Mark has become a specialist on advising pension schemes and employers on buy-outs and buy-ins.

    View Biography

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