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9% of DB schemes avoided risk levy

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  • 9% of DB schemes avoided risk levy

UK - One in 11 of the schemes eligible for entry into the Pension Protection Fund (PPF) paid no risk-based levy in the 2007/08 year, according to figures from the third version of the Pensions Universe Risk Profile (PURPLE) Book.

Details of its third annual report, also known as the Purple Book, also revealed the 10 largest levy payers of the 7,500 schemes covered by the PPF also paid a smaller proportion of the total levy in the year.

The 2008 research, published jointly by the Pensions Regulator (TPR) and the PPF, has been extended to cover 93.2% of the defined benefit (DB) schemes universe and 97.4% of the estimated liabilities, compared to 76% and 90% in the Purple Book 2007.

That said, of the 6,898 PPF-eligible schemes included in the sample, only 31% are still open to new members, compared to 36% in 2007, while the number of members in an open scheme dropped seven percentage points to 44%.

Figures from the research - based on scheme return data such as valuation information on assets and liabilities, asset allocation, and membership details - showed the recent market movements in financial markets had caused “marked changes” between 2006 and 2008.

The aggregate funding position on a section 179 (s179) basis - the buyout cost for a scheme - fell from an aggregate surplus of £74.2bn (€78.6bn), equivalent to a funding level of 109.7%, in 2007 to a deficit of £5.1bn, or 99.4% funding level, in 2008, although this is still an improvement from the £10.2bn deficit in 2006.

In March 2008, at least 68.4% of schemes in the sample were in deficit, with a total deficit of £67.7bn, the Purple Book noting since October 2002 market conditions have caused the monthly aggregate funding position to vary by around £260bn.

It also showed the extreme daily variation in funding levels experienced over the last year as in October 2008 the aggregate deficit rose from £46.9bn to £145.7bn in the space of two weeks, although overall the market turbulence reduced scheme funding by around £70bn between March and October 2008.

Other findings showed the levy collected by the PPF in 2007/08 would be around £585m, £90m less than the £675m estimate outlined in December 2006, which it attributed to actions by sponsoring employers such as increased deficit reduction contributions and the use of contingent assets.

Tthe report revealed 630, or 8.8%, of schemes did not have to pay the risk-based levy as a result, while the top 10 levy payers paid a smaller proportion of the total levy, at 11%, or £59.9m, compared with 14% in 2006/07, although schemes in the manufacturing sector experienced the largest increases in payments from £75.4m to £178.9m.

The Purple Book also revealed the average one-year insolvency probability for the 2008 dataset - using Dun & Bradstreet (D&B) failure scores - was 0.23% in March 2008.

Although the report admitted comparisons with earlier years is “difficult” because of recent changes to the D&B methodology, it noted corporate insolvencies for the economy as a whole rose in both the second and third quarters of 2008, and were 26% higher than 2007.

In addition, the Purple Book suggested “the insolvency rate is likely to rise significantly in 2009 given the economic downturn”, however it noted at mid-December the increased insolvencies had not resulted in increased claims on the PPF, as the number of section 120 notices - which are submitted by the administrators of a company winding up - are “yet to show a significant increase”.

A closer analysis of the schemes showed asset allocation continued to be dominated by equities, gilts and fixed interest, although the share of gilts and fixed interest increased from 29.6% to 33.1% over the year, while equity investments fell to 53.9% compared to 59.5% in 2007.

The largest share of total scheme equity holdings in the sample was in overseas equities - 52% - against 48% in UK equities, although it noted smaller schemes tend to have a “greater slant within equities to UK equities, and within bonds to conventional government bonds”, while total holdings in gilts and fixed interest were spread evenly between government at 33.2%, corporate at 32.6%, and index-linked bonds at 33.9% of holdings.

The Purple Book 2008 also included two new chapters on PPF compensation payments, which totalled £17.3m in 2007/08, and on risk reduction action taken by pension schemes and the sponsoring employers.

Figures showed the total number of contingent assets in place increased by around 75% from 260 for the 2007/08 levy year to 450 for the 2008/09 year, while the schemes included in the sample paid around £16.6bn in special deficit reduction contributions by 7 April 2008, and of this 53% came from employers sponsoring pension funds with less than 10,000 members.

The findings also suggested schemes are reducing investment risk through diversification into alternative asset classes such as insurance, private equity and hedge funds, and using derivatives to hedge inflation and interest rate risk.

Partha Dasgupta, chief executive of the PPF, said: “We now have three years worth of invaluable data which allows us to compare and monitor the risks that eligible DB schemes face and the way that risk is changing over time.”

Tony Hobman, chief executive of TPR, added: “The release of the third Purple Book gives increased insight into the volatile nature of scheme funding. While the data reflects the risks faced by schemes up to March, the economic climate since then has clearly got a lot tougher. We will continue to monitor the situation closely.”

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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