The 2017 Purple Book, the Pension Protection Fund’s stat-fest on DB pensions, has landed.
The document, can be accessed here.
The main headlines for me are as follows:
- The transition of schemes from “closed to new members” to “closed to future accrual” is continuing – if the trends continue, more schemes will be closed to accrual than closed to new entrants by 2018 or 2019. The number of fully open schemes is relatively stable (but only accounts for 12% of schemes);
- The funding levels of schemes (as measured on a S179 basis and a buyout basis) rose over the year to 31 March 2017, in spite of significant market turbulence which occurred around the EU Referendum Vote in June 2016;
- The average length of recovery periods for valuations submitted to the Regulator dropped slightly, from eight years to seven and a half years;
- The average insolvency rate of companies who sponsor DB schemes is around 0.3% a year – this has been relatively stable over recent years having dropped from around 0.8% in 2013/14). So, if you are a member of a scheme, your employer is (on average) significantly less likely to become insolvent than was the case four or five years ago;
- Asset allocations to equity and property are relatively stable. There is a modest switch from cash and “other investments” to “bonds”.
- I have a hunch some of this may be a re-classification of assets rather than a sign of strategic shift towards bonds.
- The relative steadiness of allocations indicates little evidence of asset allocation changes during a year which contained some shocks.
- It will be interesting to see if there is a greater shift towards bonds in 2017/18 as funding levels have improved and as there may have been some profit-taking from equity stocks. I suspect those hoping to have seen “peak bond” will be disappointed.
- The number of schemes in assessment for PPF entry has continued its steady decline, both in terms of the total number of schemes and as a percentage of the DB universe. 78 schemes were in assessment during 2017/18 (around 1.4% of the total number of schemes); and
- There is a large concentration of liabilities for schemes in assessment (around 80%) amongst schemes whose liabilities exceed £100m.
I read an interesting comment piece by Peter Smith in the ever-reliable FTfm section of yesterday’s Financial Times. It concerned a possible upcoming change in the investment strategy of the Bank of England’s own defined benefit pension scheme.
So, what have they been doing and what might be next?
Around 2007, the fund switched investment strategy from one with a mix of gilts and equities to a “portfolio exclusively focussed on index linked-gilts”. Having checked the most recent fund report and accounts (as at 28 February 2017), the actual split is around 60% index-linked gilts, 30% index-linked corporate debt (issued by the likes of Network Rail) and 10% fixed-interest gilts. The point being is that the scheme has been wholly invested in debt-based securities for over ten years. This has served the scheme very well over many years, with the funding level now reported to be 101%, an improvement from 96% in 2011. I would take issue with the contention from Marc Ostwald of ADM investors who rather uncharitably suggested that the scheme has “been an OK performer more through luck than judgement”. Many schemes will look back and wish they had achieved the same “luck” over the last ten years.
The really interesting bit is what might come next.
According to recent meeting minutes, the Scheme’s Chair of Trustees (John Footman) has stated that the Scheme was considering “alternative approaches” and “taking more investment risk”. This is being taken as a sign that gilts are “relatively less attractive” and that “defined benefit pensions are not necessarily best served by gilts”.
Gilts may not be hugely attractive, but they remain an important tool (perhaps the most important tool) in a trustee’s armoury for tackling the biggest pension scheme risks of interest rates and inflation. While many of our clients are rightly seeking higher yield where they can get it (through multi-asset credit, illiquid assets and other growth assets), gilts (and instruments such as Liability Driven Investments) will remain core to a scheme’s investment strategy.
In my view, this potential change in tack may actually be more about dampening the expected cost of future benefits than managing the risk of benefits built up to date. With ongoing accrual costs at an eye-watering 50%+ of pensionable salary, perhaps it has been decided that more investment growth is needed to mitigate this (broadly speaking, the more investment growth that is assumed, the lower level of contributions are expected to be needed to pay for future benefits).
There is no suggestion that wholesale change is on the horizon. I would expect the vast majority of the £4 billion plus fund to remain invested along current lines.
So, what can we learn from the Scheme’s approach:
- It is important to regularly review your Scheme’s investment strategy – a strategy that is right today won’t be right forever;
- Diversification (and here I agree with Mr Ostwald) should be an important consideration for scheme trustees –even the smallest of funds should be considering how different asset classes can add to overall performance and reduce risk;
- The nature of defined benefit pensions means that the ongoing build up of benefits is hugely expensive if the investment strategy is wholly gilt based. To sustain benefit accrual (where the risk can be sustained), growth-seeking assets are likely to be a necessary part of the portfolio; and
- The search for yield in the current environment may point towards alternatives to government bonds.
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Spence & Partners latest blog for Pensions Expert:
Back in the day, actuarial valuation results contained an element of surprise. The actuary would be sent the data, it would be processed, the numbers would be crunched and many months later, the results would appear.
There was often limited fore-knowledge among the recipients, be that trustees or the sponsoring employers, about what the results would show.
An actuarial valuation was a lengthy, time-consuming process, which is one of the main reasons why a valuation was only deemed necessary once every three years, and why the timescale for completion was set at 12 months and later extended to 15 months. Read more »
If they had a competition to name this Green Paper, they’d call it Dampy MacSquibface.
The much-anticipated pensions Green Paper in response to the demise of BHS dropped into the industry’s inbox yesterday.
It contains many more questions than answers, saying no to lots of things and yes to nothing. If this was a squib, it would be very much of the dampest kind. Dampy MacSquibface if you like.
The bluster of the Work and Pensions Committee is nowhere to be seen. The Paper is littered with phrases like “we do not feel there is sufficient evidence”, “all of these options have significant drawbacks”, “we would need to be certain” and “it would not be appropriate”. The world of pensions is slow enough to change – do we really need yet another agnostic consultation? Read more »
Spence & Partners, the UK actuaries and consultants, today announced their appointment by the Chartered Management Institute Retirement Benefits Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’. Services to the 250 member, £30 million Scheme will include actuarial, investment and pension scheme administration.
Alan Collins, Head of Trustee Advisory Services at Spence commented: “Recent years have presented many difficulties to the operation of defined benefit pension schemes and 2016 showed that as much as ever. It is therefore crucial that trustees and advisors step up to that challenge and pro-actively tackle the issues they face and work collaboratively with sponsoring employers to improve scheme funding levels. I have great confidence that the services we offer will assist all parties in achieving their goals.
This is an exciting and strategic appointment for Spence, as it demonstrates our growing strength in the south of England and also shows our continued strength in providing services to the not-for-profit sector.
We are very pleased to be working with the Trustees going forward.”
Martin Kellaway, Chair of Trustees for the Chartered Management Institute Retirements Benefits Scheme commented: “During the appointment process Spence were able to demonstrate very clearly how they will work with us to manage risk effectively and integrate the liability and asset side of the scheme, to develop and implement clear long term strategic objectives. The Spence approach is fresh and innovative, and we look forward to working with Alan and his team.”
Wow – what a year 2016 has been. Brexit, President Trump, Hibs winning the Scottish Cup – who saw that coming? Seriously, Hibs won the Scottish Cup.
What have we learned? The dictionary definition of “pollster” might have to change to “people who predict things and always get it wrong”, said the actuary throwing stones from his glass-house. My lesson to the pollsters is to quote a much bigger margin of error and include lots of caveats.
At least when it comes to 2017, it is now a reasonable stance to say that I’ve got no idea what’s going to happen. Read more »
The last week brought much hyperbole to the description of financial markets (using the BBC website as my barometer):
Early in the morning of 9th November (UK time), Donald Trump gave his victory speech as his election victory became certain.
9th November, 8.01 – “FTSE Sinks” – the FTSE 100 has plunged. Wow, what has happened? “Plunged” by 2% – that’s not really a plunge is it?
9th November 17.01 – “FTSE 100 Closes Higher” – the FTSE actually closes 1% higher on the day.
So, in other words, like lots of other days. Read more »
Spence & Partners, the UK actuaries and consultants, today announced their appointment by The LS Starrett Company Limited Retirement Benefits Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’. Services to the 475 member, £25 million Scheme will include actuarial, investment and pension scheme administration.
Alan Collins, Head of Trustee Advisory Services at Spence commented: “In a post-Brexit environment trustees are looking for greater scheme transparency and a more joined-up approach to funding, investment and governance. Our Mantle® system allows schemes to make informed decisions around their funding at any point in time, based upon the live administration and investment data – what we see they see. Trustees are no longer looking in the rearview mirror; instead they can be fully responsive to funding opportunities that will benefit the scheme. Ultimately, we are giving trustees and sponsors of all schemes levels of analysis and advice that is usually reserved for schemes with much larger budgets. We are very pleased to be working with LS Starrett and the Trustees.” Read more »
Spence & Partners latest Blog for Pension Funds Online –
An optimist sees the glass as half-full; the pessimist sees it as half-empty. The actuary sees it as somewhere between 40% full and 40% empty, depending on a large number of assumptions.
As a pensions actuary, I have felt more like the harbinger of doom in recent days, delivering valuation results, accounting disclosures and funding updates with 30 June 2016 effective dates. The PPF barometer of pension scheme funding, the 7800 index, is now showing an aggregate deficit of £384 billion and an aggregate funding level of around 78%. Read more »
Spence & Partners, the UK actuaries and consultants, today announced their appointment by Simons Group Limited Pensions & Life Assurance Scheme for their award-winning, fully-integrated approach to DB scheme management – ‘The Spence Approach’. Services to the 450 member, £25 million Scheme will include actuarial, investment and pension scheme administration.
Alan Collins, Head of Trustee Advisory Services at Spence commented: “The Pensions Regulator’s Integrated Risk Management (IRM) guidance encourages trustees to make joined-up decisions around funding, investment and governance. Most schemes face three key issues when trying to do this – systems, data and monitoring. Our Mantle® system allows schemes to make informed decisions around their funding at any point in time, based upon the live administration and investment data. Read more »