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Pension Protection Fund annual update on UK pension schemes

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  • UK pensions still facing a £779.9 billion deficit (end March 2016, full buyout basis)
  • Investment in UK companies continues to decline, now below 7% of scheme assets,
  • Special contributions by employers cost £10.5 billion in the first half of 2016
  • Active scheme membership falls below 1.5 million

The Pension Protection Fund has today published its annual Purple Book analysis of the state of health of the UK’s final salary pension schemes. The data covers 5,794 schemes and shows that in spite of substantial additional employer contributions and positive stock market returns, UK employers remain a staggering £779.9 billion in debt to their current and former employees’ pensions. Even on a s179 basis, which is the amount required to meet PPF level benefits, schemes are showing an aggregate deficit of £221.7 billion.

Special contributions are one-off payments in excess of the annual funding commitment, specifically to reduce a scheme deficit.

By contrast to the relatively low levels of defined benefit scheme membership in the private sector (public sector schemes are not covered by the PPF), there are now around 10.5 million members of defined contribution pensions.

Tom McPhail, Head of retirement policy, Hargreaves Lansdown commented:

Funding

“Scheme members have built their retirement plans on promises made by their employers. It is now up to those employers and the pensions industry to deliver on those promises. There should be no compromise over the level of benefits, no sneaky watering down of inflation-proofing terms to get the schemes off the hook.”

“Looking forwards, the future lies with defined contribution pensions. Too often the transition away from final salary pensions has been accompanied by massive cuts to employer contribution rates. The average defined benefit scheme employer contribution is 16.2% of earnings, compared to just 2.5% going into defined contribution plans. This trend in reducing contributions has to be reversed.”

Consolidation

“Consolidating some of these legacy pension schemes would be technically challenging but worth pursuing. It costs two to three times as much per member to run a small scheme as a large one, with consultants, independent trustees, actuaries, accountants and lawyers all taking a cut. Fewer, larger schemes would mean better security for members and lower costs for employers.”

Investment strategy

“The relationship between employers and the UK pension system has changed significantly in the past ten years. Pension schemes used to be owners of UK companies as well as being funded by them. Now, the bulk of scheme assets are invested overseas or in bonds. What’s more, as schemes mature, they will increasingly become net sellers of assets. Pensions being used to help finance the growth in British companies is becoming a thing of the past; instead our savings are either being lent to the government or invested abroad.”

The weighted average asset allocation to Equities has fallen from 61.1% in 2006 to 30.3% today; of this equity allocation, the proportion invested in listed UK shares has fallen from 48% (2008) to 22.4% in 2016.

(Source: Hargreaves Lansdown) 

 

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