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Opinion: A look-back on UK pensions in 2017

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Written by: Admin | Posted 12 January 2018 9:26

Opinion: A look-back on UK pensions in 2017

Stuart Price, partner and actuary at bristol-based Quantum Advisory, looks back at the pensions market in 2017

First of all, Happy New Year. I’d like to take this opportunity to look back at 2017 – the year that saw a record number of people investing in their pensions.

However, most people are now contributing to defined contribution arrangements and those still contributing to superior defined benefit arrangements are on the decline.

Every year, the Pension Protection Fund (PPF) publishes its Purple Book that provides an excellent overview of the UK’s defined benefit pension schemes using data the PPF has collected over the year. Here are some highlights:

The number of active members in defined benefit schemes continues to fall
Excluding the public sector, there are now only 1.3 million people contributing to defined benefit schemes, compared to 3.6 million in 2006.

The proportion of these schemes open to new members has declined every year since the PPF started recording data in 2006, due to the cost and risk to employers of supporting these arrangements, and with only 12 per cent of schemes now accepting new members, this decline looks set to continue into 2018 and beyond.

Funding levels are improving
Funding levels improved by around four per cent over the year to 31 March 2017 on top of an improvement of around two per cent in the previous year, partly due to strong returns from investment markets.

However, funding levels remain six per cent below the recent high point in 2014 and the future for scheme funding remains uncertain in 2018 as financial markets await a Brexit deal.

Recovery plans are getting shorter - or are they?
Even though funding levels have improved, most defined benefit schemes are still underfunded and have deficits.

To eliminate these deficits, the scheme’s sponsoring employer pays extra contributions to the scheme.

This is known as a recovery plan. The average recovery plan agreed during the last year was 7.5 years long, compared to eight  years in 2016 and 8.5 years in 2015.

These shorter recovery-plan lengths reflect the improvements in scheme funding and suggest that employers are using these improvements to clear deficits more quickly rather than simply to pay less.

However, schemes completing a valuation recently would have had their last valuation three years ago. Recovery plans at that time averaged 8.5 years, so all things being equal they should now have just 5.5 years left to run.

Given all that has happened in 2017 it will be interesting to see what is in store for UK pensions in 2018.

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