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Scheme costs drop 4.7% as buyouts increase

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UK - Pension scheme expenditure on pension benefits fell by 4.7% in 2007, the first significant decrease since 1984, and a move which the Office of National Statistics (ONS) attributes to an increase in pension buyouts.

In an update to Chapter 12 of the 'Pension Trends' series, focusing on pension scheme funding and investment, figures showed total income for self-administered pension funds - those managed by scheme trustees or investment managers - fell to £62.8bn (€67.7bn) in 2007 from £71.8bn in 2006.

These figures for the pension funds, which are primarily associated with defined benefit (DB) occupational schemes, also revealed total expenditure dropped by £6.9bn to £45.2bn in 2007, and most of the decrease came from a drop in pension payments and transfers to other pension schemes.

The ONS data showed net income for these pension schemes also reported an overall decline in 2007, from £19.7bn to £17.6bn, as the value of transfers from other pension schemes slipped from £9.7bn to £2.8bn between 2006 and 2007.

The latest report also highlighted the latest figures from the Pension Protection Fund's (PPF) 7800 Index which showed a £194.5bn deficit in December 2008, and pointed out the most expenditure by self-administered pension funds is on pension benefits.

The amount spent on pensions has risen since 1984, when the ONS started recording this pension data, because of the increasing maturity of DB pension schemes and as a result of compulsory indexation introduced in 1987.

However, the ONS also revealed in 2007 the amount of money spent on benefits dropped by 4.7% - the first "significant decrease" in 23 years - which it claimed "was probably the result of the rise in DB pension scheme buyouts" as the responsibility for paying benefits is transferred to the insurer.

The research also showed outgoing transfer payments reduced in value from £9bn in 2006 to £3bn a year later, though the ONS noted the cost of lump sum payments continued to rise, with payments reaching £5.8bn in 2007.

At the same time, the ONS data has also highlighted changes in the asset allocation of self-administered pension schemes - with assets valued at £1.09trn in 2007 - including a move away from corporate securities, comprising of shares, bonds and mutual funds, and a switch from UK investments to overseas assets.

Figures indicate for most of the 1990s pension schemes held more than 70% of its total assets in corporate securities but in 2007 this dropped to 61%, while the proportion of assets held in UK corporate securities has fallen from around 75% in the 1990s to 58% in 2007, as 42% of assets were held in overseas investments.

In addition, the ONS said UK schemes have gradually begun to diversify beyond equities in the last 20 years, as in 1986 it reported 95% of a scheme's investment in corporate securities was in company shares, but in 2006 this dropped to 51% and fell again to just 39% in 2007.

Instead, investments in mutual funds have risen from 2% to 46% over the same 20-year period, while allocations to UK company bonds remained flat at under 5% until the beginning of the 21st century, at which point it started to increase to 11% in 2002 and 15% in 2007.

The ONS has meanwhile also updated Chapter 4 of the 'Pension Trends' series, focusing on pensioner income and expenditure, which showed the average income for pensioner couples in 2006/07 was £508 per week, compared with £267 for single men and £240 for single women pensioners.

The research suggested the largest source of pensioner income was still in the form of state benefits, including the state pension, although occupational pensions were also a significant source of income as they made up 26% of the weekly income for couples aged under 75 and 31% for those past this age, while for single pensioners aged below and over 75 occupational pension income contributed 22% and 21% respectively.

The study also showed 67% of pensioner couples received income from occupational pensions - a median income of £144 a week - while 52% of single pensioners received money from this source, although the median income is less than half the couple's rate at just £67 a week in 2006/07.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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