Expect to See a Sharp Increase in Insolvencies Reported as a Result of the Pandemic


THE Pension Protection Fund (PPF) has published its latest overview of the UK’s defined benefit (DB) pension scheme sector – the ‘Purple Book’ – which highlights the 12 months preceding March 2020 was a record year for de-risking deals and schemes’ funding levels deteriorated.

The Purple Book, which is published every December, uses data collected over the year to 31 March and identifies trends and developments and forecasts possible implications going forward.

Speaking about the latest report, Senior Consultant and Actuary at Quantum Advisory Simon Hubbard said: “The 2020 edition of the Purple Book identified a clear decline in funding levels this year with a drop of around 4%. The key driver of this has been market movements caused by the Covid-19 pandemic, with 31 March 2020 being a particularly bad assessment date.

“This year has seen a widening gap between schemes with the strongest and weakest funding positions which is likely driven by the ability of those well-funded schemes to protect against market movements through a low-risk investment strategy, while weaker schemes have faced markets moving against them.

“2019 broke records with over £50bn of risk-transfer deals, mainly buy-ins and buyouts but also some longevity swaps, where the scheme pays a premium to transfer some of their risks to an insurance company. This is the highest value ever seen, and for the current year we might be on course for a similar level of deals based on figures from the first half of the year.

“Following recent regulations allowing ‘commercial consolidators’ to enter the market as an alternative to insurers, it will be interesting to see how this market develops.”

Speaking about the PPF, the statutory fund designed to protect members if their DB pension fund sponsoring employer becomes insolvent and the pension fund does not have enough assets to pay the benefits promised, Simon highlighted the increase in employer insolvency rates. He said: “Insolvency rates for employers in the PPF universe have increased slightly to 0.55% after falling for a number of years. Unfortunately, we can probably expect to see a sharp increase in insolvencies reported in the next Purple Book as a result of the Covid-19 pandemic and various lockdown restrictions. The PPF has previously said that its funding position is strong and it can withstand such a shock, but this will certainly set back their plans to reach self-sufficiency.

“The final key point from the Purple Book shows that, as most DB pension schemes are maturing as members age and no new members join, there has been a big shift in funds moving into lower risk assets with the average proportion of assets held in equities now standing at 20%, down from around 60% when the Purple Book started in 2006. Over the same time period the proportion invested in gilts has more than doubled, with more complex assets such as Liability Driven Investments also gaining popularity. However, the supply of gilts in the market is limited which pushes prices up and makes the aim of moving into gilts more expensive. This in turn means that gilt yields fall, and the value placed on DB scheme liabilities increases. As a result, some schemes are now removing the link between scheme funding and gilts, instead basing their funding on inflation or expected asset returns.”

Quantum Advisory specialises in pension and employee benefits services to employers, scheme trustees and members. For more information about your pensions, visit www.quantumadvisory.co.uk.