Out-Law News 2 min. read

Report shows 'stable' defined benefit pensions market after 'year of major shifts'


There were few changes to the UK's 6,000 defined benefit (DB) pension schemes this year, despite "major shifts" in workplace pension regulation, according to a new report.

The percentage of DB schemes open to new members has fallen dramatically over the last 10 years, from 43% in 2006 to 13% in 2015, according to the latest edition of the 'Purple Book', which is published annually by the Pensions Regulator and the Pension Protection Fund (PPF). The report also showed how schemes were attempting to reduce investment risks by changing their preferred investments, increasing investment in gilts and fixed interest products and decreasing exposure to equities.

Fewer schemes closed to new members in 2015 than in previous years, according to the report. However, pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that this was less an indication of changing attitudes to DB and more a reflection of "the fact that there are now fewer schemes to close".

"We can't take this as a fundamental reversal of fortunes for DB schemes," he said.

"The Purple Book underlines how far DB schemes have gone in moving away from equities into bonds. This reduces volatility for DB schemes, but also reduces the chances of growth if markets start to outperform expectations," he said.

The data in the Purple Book was based on scheme returns received by the regulator before the end of March 2015. This means that although these are the first definitive figures on DB issued since the introduction of the so-called pension 'freedoms' in April 2015, they do not show the impact, if any, that the new tax treatment of defined contribution (DC) pension savings has had on DB.

Andrew Warwick-Thompson, the Pensions Regulator's executive director, said that the report marked a "significant moment" for DB schemes in the UK.

"After a decade of dramatic decline, the DB landscape has reached a point of relative stability in terms of scheme status and membership," he said. "However, the impact of new pension freedoms will not be seen until next year's Purple Book, and may yet shift the landscape again."

"We have entered a new phase and we call upon trustees and employers to work together to agree their long-term aims, and the best way to secure their members' benefits. We are committed to exploring credible new ideas with the pensions industry, and to working with sponsors and trustees to secure sustainable schemes that deliver good member outcomes over the decades to come," he said.

DB schemes promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment. The number of these schemes open to new members has fallen dramatically over the past decade due to a combination of increasing life expectancy, poor investment results and stricter regulation pushing up the costs of funding them.

According to the 2015 Purple Book, the number of 'active' memberships of UK DB schemes fell by 3.4% over the course of the year, to 1.75 million. Active membership refers to scheme members who are in pensionable service. This was the smallest drop in active membership recorded since the survey began in 2006, although the number of active memberships is currently around half of what it was in the 2006 Purple Book.

DB scheme funding deteriorated by a further 1.5 percentage points between the end of March 2015 and the end of September, which was mainly due to the continuing impact of lower equity markets and gilt prices on assets. Schemes eligible for the PPF, which pays compensation to members of DB schemes if their employers become insolvent, were a combined £244.2 billion in deficit as of the end of 31 March 2015, according to the report.

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