UK scheme funding boosted by stock markets, longevity changes

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The overall funding position of UK defined benefit (DB) schemes improved significantly in 2017, according to new figures. 

According to the Pension Protection Fund (PPF), total assets held by UK private sector DB funds grew by 7.7% over the course of the year, from under £1.5trn (€1.7trn) to nearly £1.6trn.

Combined liabilities fell slightly, the PPF reported, to just under £1.7trn. This left an aggregate funding level of 94%, compared with 87% at the end of 2016.

The data backed up similar research from consultants JLT Employee Benefits and Mercer, which both reported that asset growth outstripped increases in liabilities during 2017.

Mercer found that the funding position for FTSE 350-listed company pension schemes improved marginally. Combined DB liabilities grew by 4.4% to reach £857bn, but assets rose by nearly 6% to £781bn. This left an aggregate funding ratio of 91% at the end of 2017, compared with just under 90% a year earlier.

JLT reported similar findings in its estimate of the aggregate FTSE 350 schemes’ funding position, which it said rose from 91.6% to 93.7% during the year.

Its data for all private sector DB schemes showed that the aggregate funding level rose from 89.2% to 91.5%.

Charles Cowling, director at JLT Employee Benefits, said a slowdown in the rate at which longevity was increasing had helped rein in liability increases, as had growing expectations of interest rate rises.

Alan Baker, partner at Mercer and chair of its DB policy group, said the funding improvement could release significant capital for companies to invest in growth rather than fund their pension schemes.

“This is really positive news for the UK economy because improved profits in 2018 resulting from lower pension costs could amount to £400m among the FTSE 350 [companies],” he said.

However, his colleague Andrew Ward, head of risk transfer consulting, said that “the levels of risks being taken are still significant and the positive outcome we have seen for 2017 is very closely linked to stock market performance”.

“As we move into 2018, it’s important for individual schemes to consider how prepared they are for any market shock,” Ward added. “With Brexit-related uncertainty trustees need to consider the potential impact on their sponsor’s financial security.

“Against this backdrop, we expect schemes to reduce risk and consolidate gains. The pace of risk management activity we saw in 2017 is likely to accelerate and we expect 2018 to be the biggest year ever for pension risk transfer.”

JLT’s Cowling echoed Ward’s prediction, and added that increased appetite for buyouts could reduce the number of private sector DB schemes to fewer than 5,000 by 2020.

The PPF said there were 5,588 schemes in its 7800 Index database at the end of December.

Debates over DB scheme closures – including high profile cases such as Royal Mail, USS and Tesco – drew negative headlines in the UK national press last year as scheme sponsors sought to address large deficits.

In addition, controversy surrounding the British Steel Pension Scheme’s restructure and government inquiries into the DB system drew attention to the shortfalls in many schemes.

However, the latest funding data appeared to support the UK government’s assertion last year that there was no overarching funding crisis in the country’s DB system.

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