1. A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum (or combination thereof) on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns.
2. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.
3. Over time, these plans may face deficits or surpluses between the money currently in their plans and the total amount of their pension obligations. Contributions may be made by the employee, the employer, or both. In many defined benefit plans the employer bears the investment risk and can benefit from surpluses.
PENSION PROTECTION FUND (PPF) FINDINGS -MAJORITY OF DB PENSION SCHEMES IN DEFICIT
1. Almost two-thirds of the UK’s defined benefit (DB) pension schemes are running at a deficit, despite funding increasing to the highest levels recorded since 2014.
2. The combined deficit of schemes reporting a shortfall stands at £187.6bn, while it was also found that the average length of recovery plans remains “stubbornly high” at 7.8 years.
3. At the same time, higher gilt yields, rising equity markets, and more up-to-date valuations saw the aggregate funding level of DB schemes rise by 5.2% to 95.7% in the last financial year.
4. The current economic and political backdrop coupled with recent stock market volatility means companies should continue to take steps to de-risk their schemes.
5. Large company schemes with more than 5,000 members account for 75% of all assets, liabilities and members, but make up just 7% of the schemes studied. It was also found that the proportion of company DB schemes open to new members has stayed steady at 12%, but that the number of PPF-eligible schemes fell from 5,588 to 5,450 this year.
6. A continuation of de-risking trends was observed, with the proportion of equities held decreasing and bonds increasing, while the highest number of DB transfers since 2015 was recorded. These transfers amounted to £10.6bn in the first quarter of this year, however, the PPF said this remains relatively small considering the pension universe has liabilities of £1.6trn.
SURVEY - 80% DB PENSION SCHEMES TO BE CASH FLOW NEGATIVE WITHIN 5 YEARS
1. Defined benefit (DB) pension schemes in the UK are increasingly worried about liquidity, with four-fifths expecting to be cash flow negative within five years.
2. This has led to greater interest in illiquid assets matching cash flows, with many schemes also making liability-driven investments, and hedging interest rate and inflation risks.
3. Seven in 10 respondents said now might be the time to consider alternative valuation methodologies, which Leahy said was understandable thanks to falling gilt yields and increased deficits.
4. Nearly two-thirds think their current investment strategy is on track to reach full funding within agreed recovery periods, and without additional support from their sponsor.
5. Seven in 10 claim to review their investment strategy at least once a year, although larger ones with more than £1bn in assets are likely to conduct these more regularly.
6. The survey findings, which are thought to be representative of all UK DB pension schemes, also show that more than half still manage their funding, investment and covenant separately.
SURVEY - INSURERS INVESTMENT HOPES FALLS
1. Insurers are increasingly worried that their investments will not achieve desired returns amid rising equity market volatility and risk, a global survey has found.
2. Two-fifths expect average annual returns to be less than 5% over the next five years – a sharp increase on the 22% that said the same a year ago.
3. Meanwhile, confidence in achieving their desired returns has slipped from 61% to 54%, with insurers selling 19% of their portfolios on average, up from 13% last year.
4. In terms of specific investment challenges, equity market volatility, interest rate risk and credit defaults were the three main risks highlighted by the respondents. They expect to increase private asset allocations from 9% to 11% on average over the next 12 months, with diversification and better risk management the key motivations.
5. Improved risk-managed investment solutions were the top innovation desired by the insurers, with 62% hoping to see more over the next 12 months. It was also found that almost three-quarters of insurers’ assets are currently actively managed.
6. In addition, 73% expect sustainable investing to become more important in the next five years, compared with 21% that predict no change and 6% who think it will be less prominent.
Source:Theactuary
