On the go: Fifty-seven per cent of defined benefit schemes in the UK are in deficit, with an aggregate shortfall of £160bn, according to the latest edition of the Pension Protection Fund’s Purple Book.
As of March 2019, the funding of the 5,436 schemes in the PPF universe, comprising 10.1m members, had improved to 99 per cent from 97 per cent in the previous year, when the pension funds had a shortfall of £188bn.
The overall trend for derisking has continued, with only 24 per cent of scheme assets invested in equities, compared with 27 per cent in 2018 and 61 per cent in 2006.
However, underfunded schemes tend to be the ones invested more heavily in equities, the PPF found. Overfunded pension funds have on average 69 per cent of their assets in bonds, compared with just 25 per cent for those schemes with a funding ratio below 50 per cent.
According to Stephen Wilcox, chief risk officer at the PPF, while many schemes have reduced their investment risk, the shortfall of schemes in deficit is more than double what it was in 2006 when the economic circumstances were much less favourable.
“The funding ratio of schemes in deficit is particularly vulnerable to economic shock,” he said.
“Although the PPF is much better equipped to manage that risk than we have ever been – our own funding ratio is stable, we have years of experience under our belt and we have a healthy reserve to fund future claims – the potential claims of underfunded schemes pose a significant risk, which is beyond our control.”
Lisa McCrory, chief actuary at the lifeboat, said: “The long tail of small, underfunded schemes is a particular concern. Fifty-eight per cent of schemes with 100-999 members are less than 75 per cent funded.
“Our focus is to manage our own funding prudently, to manage our balance sheet effectively, and to understand the risks we face. At this stage of our evolution, a probability of success around 90 per cent indicates a high level of confidence that we are on track to meet our funding target.”
