On the go: The coronavirus pandemic and attendant national lockdown saw a marked deterioration in defined benefit scheme funding positions, with the overall deficit up £41bn as of March 2020 compared with the same date in the previous year.
The Pensions Regulator’s annual landscape report covering DB and hybrid schemes showed that the deficit as of March 31 2020 topped £200bn, up from £159bn in the year before.
The report covered 5,604 schemes, of which only 567 remain open, with 194 currently in the process of winding up.
The figures represent the “declining universe” of DB schemes, which is having the effect of concentrating the bulk of assets, liabilities and members in a few very large schemes”.
According to the dataset: “Schemes with more than 5,000 members account for almost 75 per cent of each of the population total of assets, liabilities and members, while only forming around 7 per cent of the total number of schemes in [the] main dataset.
“Conversely, schemes with fewer than 1,000 members make up around 80 per cent of the total number of schemes, but only around 10 per cent of total assets, liabilities and members.”
Some 2,235 schemes were closed to new members and 2,608 closed to future accrual, the former down 1 per cent and the latter up 3 per cent compared with 2019.
This drop in the proportion of schemes in which benefits are still accruing, from 52 per cent in 2019 to 50 per cent in 2020, has left only 1m people continuing to accrue benefits.
Sarah Brown, Buck’s principal and senior consulting actuary, noted that “these members make up less than 10 per cent of total private sector DB scheme membership. As a result, many sponsors continue to consider how to manage the cost of new accrual, and schemes are increasingly focused on how to manage those benefits that have already accrued”.
Of the deficit, she added: “It is perhaps no surprise that funding positions as of March 31 2020 look much less favourable than those a year ago. This was a point when gilt yields were low and markets depressed, as the full effects of the pandemic began to impact the UK.
“Many schemes have seen their funding rebound since then, but the events of last year highlight how important it is for trustees and sponsors to monitor their funding position and have plans in place for when conditions change.”
Brown highlighted a lack of any updated analysis on the levels of inflation-linkage in pension schemes.
She said: “Last year’s report showed that a significant percentage of members of defined benefit schemes have a form of [retail price index]-linkage on some of their benefits, and we expect this to still be the case. For example, more than half of members with benefits accrued from April 1997 have pension increases linked to the RPI — in many cases, with some cap on increases.
“The reform announced to RPI last year will affect those members’ future increases, with their future RPI-linked pension increases expected to be as much as 1 per cent a year lower,” Brown continued.
“This will significantly erode the value of many members’ pensions compared with previous expectations.”
