Oddly last year’s Purple Book revelations (released December 2018) went mostly unnoticed, unannounced, ignored; probably hidden? Those golden handcuffs of employment-past appear jaded and vulnerable. It seems normal, now, to be expected to only get around 3% pa of employer pension contributions, while we regularly see old-style pension contracts worth hundreds of thousands of pounds, to which an employee contributed barely ten over the period of their employment.
The golden age of benefits packages are a distant memory to those lucky enough to have been part of the pension-benefits-era.
For those non-industry folk, The Purple Book is the bible of data across UK defined benefit pensions; focused upon the potential demise of such schemes, their deficits and possible need for compensation and savior. Those pensions who secured loyal employees for their working lives are now at threat, weighing heavy on the balance sheets of thousands of firms across the UK, mentioned commonly in the press – yet seemingly only upon the failure of another well-known, ‘too big to fail’ brand.
The Purple Book 2018: Highlights
https://www.ppf.co.uk/news/purple-book-2018
A quiet read, but its 101 pages contain some quite critical information. Here we pass-on just a few snippets we believe pertinent to our advice, and potentially your financial future:
Scheme Failures
- Insert table showing data of no of schemes v year
- Fig 2.3
6,596 defined benefit pension schemes were in existence in 2010, yet just 5,450 in 2018. Every year this figure reduced, yet since 2010 the investment markets have been largely positive. So, why have we lost nearly 18% of all defined benefit schemes in 8 years? Investment strategy in comparison to an increasing liability for scheme assets may be part of the problem. Schemes are struggling; funds must be invested sensibly, but will conservative investment approaches be sufficient for the liability of paying people their lifetime incomes; with the main unknown being how long those people will live to claim income?
Scheme Investment Strategies
Following on from the above, below is a breakdown of asset allocation within pension schemes over the same time period. Equities are, generally, seen as the best long-term asset for positive growth, yet as schemes become increasingly concerned over their welfare, fund managers are becoming ever-more conservative; moving away from long-term growth models and toward security – but can this sustain the needs of a pension fund over the long-term?
- Insert data from fig 7.2
The ‘Probability’ of the PPF meeting its funding objective
The Pension Protection Fund (PPF) isn’t government or taxpayer backed. It is effectively a private-insurer for public-use. It collects funds by charging a levy to schemes (NB. yet such schemes are depleting) in order to fund its compensation payouts. The PPF offers an excellent and informative website; www.ppf.co.uk and is clear in its objectives, abilities and limitations. The most surprising revelation of the Purple Book came on page 58; ‘the sensitivities of the probability of the PPF meeting its funding objective’, not the most encouraging of statements.
- Insert fig 8.2
Basing probability at 92% isn’t the best start, but the revelations over further potential impacts is clearly worrying. For those relying on the PPF to step-in should their sponsoring employer fail, these statistics are concerning. The PPF caps income, inflationary awards, death benefits, retirement age, and the ability to generate a lump sum at-retirement. The PPF should be respected and treated as a last-resort rather than a comfort blanket. In the event the PPF fails, will pension schemes seek assistance from the government and UK taxpayer? If so, how many of the 5000+ schemes will, or can, be helped?
The baby-boom era benefitting from defined benefit scheme pensions will live for a further 30-50 years, it is important that we consider the ability for these thousands of schemes to maintain their funding provisions and pay the lifetime incomes to their ex-employees as promised.
Defined benefit pension schemes are hugely valuable, however it is vital that you understand your assets; their benefits and limitations. Retirement planning isn’t necessarily about making changes, but about putting in place a long-term plan to ensure and secure your financial future.