The Pension Safety Fund’s annual Purple Book is nearly universally considered the authoritative “state of the nation” information to the UK’s personal sector outlined profit schemes — their belongings, liabilities, sizes, quantity and asset allocations. And provided that this class of fund instructions shut to 1 and a half trillion kilos of belongings, their actions are of vast curiosity.
The headline from final 12 months’s almanac was that these DB schemes — in combination — may afford to ‘buy-out’. That’s to say they might afford at hand the keys of their pension funds to insurers, and stroll away from the liabilities. Louis even made considered one of my all-time favourite Alphaville header images in honour of this occasion.
The headline this 12 months, as covered by MainFT, is that final 12 months’s headline was nonsense. The brand new Purple Ebook accommodates, together with recent 2024 knowledge, some absolute monster revisions to the 2023 knowledge that we’d thought was locked in. Most eye-catchingly, the £150bn buy-out surplus has been revised away to change into a £130bn buy-out deficit.
Admittedly, a ‘buy-out’ pension legal responsibility valuation is probably the most brutal of legal responsibility valuation measures. This brutality emanates from it utilizing the bottom low cost price of any legal responsibility valuation measure and widest potential set of pension advantages. (Low cost charges and legal responsibility valuations are inversely linked, just like bond yields and prices.)
Whereas much less eye-catching, what the PPF actually cares about are ‘s179 legal responsibility’ valuations. Broadly talking, an s179 legal responsibility is what the PPF is on the hook for if a scheme’s sponsor goes bust and the scheme lacks the belongings to pay advantages. Utilizing this measure, schemes are nonetheless sitting on an enormous surplus. Nonetheless, the Purple Ebook restates this measure of 2023 surpluses down by a cool £152bn — nonetheless a colossal quantity.
To know what’s occurring, we have to step again.
The PPF pulls collectively the Purple Ebook knowledge utilizing annual scheme returns, which outlined profit pension schemes are required by legislation to undergo The Pensions Regulator.
When you suppose that this return may include a valuation of belongings and liabilities, you’d be flawed. As a substitute, the annual return accommodates solely a duplicate of the scheme’s newest s179 actuarial valuation. However s179 valuations are calculated solely as soon as every three years, and schemes then have 15 months to submit it following the valuation date. So the PPF’s knowledge may be very very outdated. Actually, solely 4 per cent of schemes submitted an annual return final 12 months with an s179 valuation that associated to the earlier 12 months.
Missing present knowledge, the PPF makes a guess as to what numbers schemes may report if that they had all submitted an s179 valuation dated March of the present 12 months — somewhat than no matter it was they really reported. With a lot guesswork occurring, perhaps the revisions are much less stunning?
Let’s undergo the figures to see how the PPF’s estimate of 2023’s s179 surplus (aka web funding) dropped by £152 billion:
First up are money flows. Pension schemes have paid out extra in pensions than beforehand assumed. It seems that the PPF didn’t trouble to mannequin the truth that pensions pay, er, pensions.
We spoke to Shalin Bhagwan, chief actuary on the PPF, to know why. He informed us that the “Purple Ebook was initially meant to supply the PPF with a snapshot of the danger that it was operating”. Whereas paying pensions shrinks each belongings and liabilities, it doesn’t actually change the PPF threat place. And it’s true that together with it hardly touches the full surplus estimate. So sources weren’t put into modelling these money flows till now.
Subsequent up is “PPF drift” / precise inflation. It is a larger deal.
Till final 12 months, the PPF took s179 legal responsibility valuations submitted by schemes to The Pensions Regulator and totted them up. Really, they didn’t simply tot them up, additionally they ‘rolled ahead’ their current values utilizing more-up-to-date bond yields in order that they’re all on close-to-the-same-page when it comes to their foundation of valuation. Appears smart.
However outlined profit pensions are usually inflation-linked. And the PPF solely made allowance for liabilities’ inflation-linkage as much as 2.5 per cent each year — according to their compensation phrases for schemes which have been picked up by the pensions lifeboat. Keep in mind when inflation spiked to 11.1 per cent in October 2022? Eek. With such a excessive share of valuations posted earlier than inflation spiked, the outdated determine was on the low aspect. Indexing to precise inflation somewhat than PPF-compensation inflation lifted the estimate by £60bn.
Lastly, we come to “refined asset roll-forward, together with a wider set of market indices”. Is that this a euphemism for “My funding supervisor turned out to not be the genius I believed s/he was”? No.
With schemes offering solely lagged knowledge, the PPF must do a good quantity of guesswork to reach at a complete asset quantity. However hey, DB schemes are stuffed stuffed with bonds today, so how onerous can it’s? Tougher than we’d have predicted.
As FTAV readers will know, not all bonds are the same. A one-year bond’s worth hardly strikes if yields rise or fall by 100 foundation factors, whereas a fifty-year bond’s worth jumps round by perhaps twenty 5 proportion factors on the identical yield shift. And it’s solely actually post-LDImageddon that the Regulator has requested schemes to supply asset allocation data on their annual returns that may permit the PPF to separate bonds into half-sensible maturity buckets. Armed with this new knowledge, the PPF discovered that schemes went into the bond meltdown with their liabilities a lot better-hedged than beforehand assumed. In different phrases, whereas the PPF knew pension funds had numerous bonds, they hadn’t understood that fairly so many of those bonds had been the actually long-dated ones that totally puked. Armed with this new info, the PPF minimize their asset estimate by £89bn.
When you’ve acquired this far and are questioning “So what?”, you’re seemingly not alone. Let’s change to bullet level format to hurry issues alongside and flag some potential winners and losers.
Losers
Bulk annuity insurance coverage corporations:
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OK, so the quantity and worth of particular person viable potential shoppers has not truly modified an iota. In any case, it is a story about how fashions didn’t seize actuality. However a typical metric of their complete addressable market has simply shrunk rather a lot. In 2023 the PPF estimated that 3,163 schemes may afford to be buy-out clients. Now, it reckons only one,852 may afford the worth of buy-out. 😞
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Nonetheless, insurers proceed to print vast volumes of transfers, so let’s not really feel too sorry for them.
Policymakers:
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We are able to’t make certain, however the resolution to focus first on Native Authorities Pension Schemes and Outlined Contribution pensions within the Pensions Assessment could have been knowledgeable on the margin by an understanding that enormous, closed DB pensions had been a spent pressure, most certainly to be consolidated by insurers. On condition that they’re now not good for buy-out, perhaps they need to’ve been increased up the coverage to-do record? 🫣
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Moreover, again in February the government consulted on the plan to have the PPF use its extra reserves as capital for a brand new public sector superfund consolidator for over-funded small schemes. Their newly understood (weaker) funding place may make the entire enterprise a extra distant prospect.
Belief in pensions knowledge:
Winners
UK asset managers and Superfunds:
Pension fund trustee egos:
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You’re a median trustee making an attempt to do your finest to your scheme. Your funding has improved from round 75 per cent to round 90 per cent on a buy-out foundation between 2022 and 2023. 😊
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However the 2023 Purple Ebook informed you that each one your friends had reached 110% buy-out funding, having better-dodged LDI asset writedowns. This made you unhappy. 😔
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You now study that everybody else is definitely in the identical boat. 😌
The reality:
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Official knowledge will get restated and revised on a regular basis. In all probability the brand new knowledge will get revised once more as new and higher info involves mild. If you discover a knowledge downside, one of the best factor to do is at all times to stay up your hand and repair it. 😇
Publishing an authoritative Bumper Ebook of UK Pensions was by no means the PPF’s transient. However this hasn’t stopped gilt market / asset administration / coverage varieties, or certainly us from treating it as such. In the end, it’s a very good factor that the PPF has stepped up its efforts at offering a extra correct guess as to the place system-wide belongings and liabilities may be. Even when doing so is a bit embarrassing.
