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Scheme funding analysis 2021 annex

Annex: valuations and recovery plans of UK defined benefit (DB) and hybrid pension schemes.

Published: 27 July 2021

Data coverage

The data contained in this statistical release were submitted by schemes to The Pensions Regulator (TPR) in triennial valuation summaries, their associated recovery plans (RPs), and annual scheme returns.

The data set builds on previous releases and includes Tranche 14 valuations and associated RPs received up to 31 January 2021. It also includes data on schemes in surplus for all tranches.

Tranche 14 is the second tranche of the fifth cycle of the Scheme Funding Regime. The majority of Cycle Four plans (Tranches 10, 11 and 12) and Cycle Three plans (Tranches 7, 8 and 9) are fourth and third valuations respectively under the scheme funding regime. However, Tranches 3, 6, 9 and 12 (1, 4, 7 and 10, etc) do not constitute a perfect cohort. There are a few reasons why this may be the case, including the following:

  • some schemes have had their most recent valuation less than three years since their previous valuation
  • where a scheme’s assets were less than its technical provisions (TPs) in the previous cycle (ie Tranche 11) but exceeded its TPs for its valuation under the current cycle (ie Tranche 14)
  • where a scheme has wound up or is in the process of winding up
  • where a scheme has transferred to the Pension Protection Fund (PPF)

Base data varies slightly in different sections as a result of data coverage, validation, and cleaning.

The data count all memberships in schemes with a promise to a pension. As some individuals may have a number of pension entitlements spread over a number of schemes, they may be included more than once in the total memberships under consideration.

The summaries on mortality assumptions are based on current male pensioners aged 65 only, unless otherwise stated.

Methodology

Weighted averages are weighted by TPs. Where ‘average’ is used in the report, it refers to the mean.

Owing to the scheme-specific nature of the data, individual data points cannot be presented in some instances. As such, data distributions start and end at the 5th and 95th percentiles respectively, and in some instances group ranges have been broadened to include figures comprising fewer than 10 observations.

Figure totals may reflect rounding.

Maturity is measured as the ratio of pensioner TPs to total TPs.

The discount rate assumption is reported in one of two formats:

  • a single investment return
  • different investment returns for pre-retirement and post-retirement benefits

For the purposes of comparison, in instances where different rates have been reported, a single effective discount rate (SEDR) is calculated. This is based on the single rate or, where a different rates approach has been adopted, constructed from both the pre- and post-retirement rates. This is calculated using the following equation of value:

(ActiveLiabilities)×(1+Pre−retirementDiscountRate ) ActivePre−retirementDuration ×(1+Post−retirementDiscountRate ) ActivePost−retirementDuration +(DeferredLiabilities)×(1+Pre−retirementDiscountRate ) DeferredPre−retirementDuration ×(1+Post−retirementDiscountRate ) DeferredPost−retirementDuration +(PensionerLiabilities)×(1+PensionerDiscountRate ) PensionerDuration =(TotalLiabilities)×(1+SEDR ) TotalDuration

The duration parameters used in the above formula are estimated on a scheme by scheme basis, using data provided to us in the annual scheme return and valuation returns. Using the above formula the SEDR has been calculated for all schemes (tranches 1-7: schemes in deficit only, tranches 8-14: all schemes), and as such historical positions will differ to earlier publications.

Average annual deficit repair contributions (DRCs) summarised in Table 3.4 are calculated as the average of DRCs over the first four years of the RP.

The outperformance of the SEDR is calculated using different 20-year gilts (nominal and real) to previous editions. As a result, the levels of outperformance assumed will differ to those shown in previous reports. The differences may be inconsistent across tranches because the relationship between the Bank of England 20-year nominal government spot rate and FTSE index 20 year conventional gilt (used previously) varies at different dates.

Covenant Groups (1-4) are assigned at the point of initial RP reviews to facilitate prioritisation. These grades may vary to the view taken during case-level intervention, where a wider range of information is taken into account. They are defined as:

  • Covenant Group 1: Strong
  • Covenant Group 2: Tending to strong
  • Covenant Group 3: Tending to weak
  • Covenant Group 4: Weak

Covenant assessments are not usually undertaken for schemes in surplus.

‘Return-seeking assets’ as a proportion of total assets held comprise the sum of:

  • 100% of a scheme’s allocation to equities
  • 75% of property
  • 100% of commodities
  • 60% of Insurance policies
  • 80% of hedge funds
  • 25% of corporate bonds
  • 100% of assets held in the ‘other’ category

The PPF stressed asset ratio used in this report refers to: the ratio of the stressed value of assets to the (unstressed) market value of assets. For the purposes of this report the stressed value of assets is calculated for all schemes using the standard approach, but where the results of a bespoke stress have been submitted these have been instead used. The methodology for the standard stress test is consistent with the methodology published in the relevant levy year.

Employer Industry Classification and Geographical Area as used in the Life Expectancy section have been derived using:

  • the SIC code, and
  • the Registered Trading Address post code of the largest sponsoring employer by number of DB members to each scheme

Schemes in the data set

Table 1.1: Number of valuations analysed by cycle and tranche (schemes in surplus and deficit, all tranches)

Funding and other security arrangements

Table 2.1a: Key average funding ratios (schemes in surplus and deficit)

Table 2.1a: Key average funding ratios

Table 2.1b: Key weighted average funding ratios (schemes in surplus and deficit)

Table 2.2: Distribution of key funding ratios on various bases

Table 2.3a: Average [Unweighted] ratio of assets to TPs by scheme characteristics (schemes in surplus and deficit)

Recovery plans and contributions

Table 3.1: Distribution of recovery plan lengths (schemes in deficit only)

Table 3.1: Distribution of recovery plan lengths

Table 3.2: Distribution of recovery plan lengths (for schemes in deficit submitting valuations in respect of both Tranches 11 and 14)

Table 3.2: Distribution of recovery plan lengths

Table 3.3: Average recovery plan length by scheme characteristics (schemes in deficit only)

Table 3.3: Average recovery plan length by scheme characteristics

Table 3.4: Average annual contributions as a percentage of technical provisions liabilities by scheme characteristics (schemes in deficit only)

Table 3.4: Average annual contributions as a percentage of technical provisions liabilities by scheme characteristics

Discount rates

Table 4.1: Average nominal discount rate and outperformance by Tranche (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.1: Average nominal discount rate and outperformance by Tranche

(a) Single rates provided

(b) Different rates provided

(c) Composite of pre- and post-retirement rates where different rates are provided

(d) Combined single and different rates

Source for (e): Thomson Reuters, Bank of England

Source for (f): Thomson Reuters, Markit Iboxx

Table 4.2: Average real discount rate and outperformance by Tranche (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.2: Average real discount rate and outperformance by Tranche

(a) Single rates provided

(b) Different rates provided

(c) Composite of pre- and post-retirement rates where different rates are provided

(d) Combined single and different rates

Source for (e) : Thomson Reuters, Bank of England

Table 4.3: Average nominal SEDR by scheme characteristics (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.3: Average nominal SEDR by scheme characteristics

Table 4.4: Average outperformance of the nominal SEDR over nominal 20 year UK gilts by scheme characteristics (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.4: Average outperformance of the nominal SEDR over nominal 20 year UK gilts by scheme characteristics

Table 4.5: Average outperformance of the nominal SEDR over greater than 15 year AA rated corporate bonds by scheme characteristics (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.5: Average outperformance of the nominal SEDR over greater than 15 year AA rated corporate bonds by scheme characteristics

Table 4.6: Average real SEDR by scheme characteristics (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.6: Average real SEDR by scheme characteristics

Table 4.7: Average outperformance of the real SEDR over the 20 year spot rate on UK gilts by scheme characteristics (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.7: Average outperformance of the real SEDR over the 20 year spot rate on UK gilts by scheme characteristics

Table 4.8: Distribution of the nominal SEDR (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.8: Distribution of the nominal SEDR

Table 4.9a: Distribution of the outperformance of the nominal SEDR over nominal 20 year UK gilts (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.9a: Distribution of the outperformance of the nominal SEDR over nominal 20 year UK gilts

Table 4.9b: Distribution of the outperformance of the nominal SEDR over greater than 15 year AA rated corporate bonds (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.10: Distribution of the real SEDR (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.10: Distribution of the real SEDR

Table 4.11: Distribution of the outperformance of the real SEDR over the 20 year spot rate on UK gilts (Tranches 1-7: schemes in deficit only, Tranches 8-14: all schemes)

Table 4.11: Distribution of the outperformance of the real SEDR over the 20 year spot rate on UK gilts

Mortality assumptions

Table 5.1: Base mortality tables (schemes in deficit only)

Table 5.1: Base mortality tables

Table 5.2: Loadings applied to base mortality tables (schemes in deficit only)

Table 5.2: Loadings applied to base mortality tables

Table 5.3: q(x) adjustments to base mortality tables (Tranche 14 schemes in deficit only)

Table 5.3: q(x) adjustments to base mortality tables

Table 5.4: Adjustments to base mortality table from valuation date (schemes in deficit only)

Table 5.4: Adjustments to base mortality table from valuation date

Table 5.5: Size of improvement adopted by tranche (schemes in deficit only)

Table 5.5: Size of improvement adopted by tranche

Life expectancy

Table 6.1a: Distribution of life expectancies for future male pensioners aged 45 (schemes in surplus and deficit)

Table 6.1a: Distribution of life expectancies for future male pensioners aged 45

Table 6.1b: Distribution of life expectancies for current male pensioners aged 65 (schemes in surplus and deficit)

Table 6.1b: Distribution of life expectancies for current male pensioners aged 65

Table 6.1c: Distribution of life expectancies for future female pensioners aged 45 (schemes in surplus and deficit)

Table 6.1c: Distribution of life expectancies for future female pensioners aged 45

Table 6.1d: Distribution of life expectancies for current female pensioners aged 65 (schemes in surplus and deficit)

Table 6.1d: Distribution of life expectancies for current female pensioners aged 65

Table 6.2a: Average life expectancies for current male pensioners aged 65 by scheme characteristics (schemes in surplus and deficit)

Table 6.2a: Average life expectancies for current male pensioners aged 65 by scheme characteristics

Table 6.2b: Average life expectancies for future male pensioners aged 45 by scheme characteristics (schemes in surplus and deficit)

Table 6.2b: Average life expectancies for future male pensioners aged 45 by scheme characteristics

Table 6.3: Average change in life expectancies for current male pensioners aged 65 by scheme characteristics, Tranche 11 versus Tranche 14 (schemes in surplus and deficit)

Table 6.3: Average change in life expectancies for current male pensioners aged 65 by scheme characteristics

Glossary

00 series base mortality table (00 series)

Based on 1999-2002 experience collected from UK insurance companies.

92 series base mortality table (92 series)

Based on 1991-1994 experience collected from UK insurance companies.

08 series base mortality table (08 series)

Based on 2007-2010 experience collected from UK insurance companies.

Actuarial valuation

A comparison by the actuary of the value placed on scheme assets with the TPs and an assessment of any future contribution requirement. Calculation of the TPs is usually based on full member-by-member data.

Buyout liabilities (or s75 or solvency)

This refers to the scheme actuary’s estimate of the cost of securing scheme liabilities with annuities purchased from a regulated insurance company, which may be used as the solvency estimate as part of the actuarial valuation for a scheme in windup. Section 75 (s75) of the Pensions Act 1995 provides for the calculation of a debt on the employer on the buyout basis (see s75 debt) if a scheme winds up (or if an employer becomes insolvent or ceases to participate in a multi-employer scheme). Throughout this publication the term ‘buyout’ is used. In a small number of cases, an alternative measure of solvency is submitted to TPR, in which case this will be the data that has been used in this analysis and there is no distinction made.

Contingent assets

Contingent assets are assets on which a claim by the pension scheme would exist on the occurrence of one or more specified future events (‘the contingent event’), such as movements in corporate asset holdings, increased employer borrowing, employer failure or the failure to achieve a specified funding level. Unless the events occur, these assets are not available to the trustees to meet members’ benefit payments. They are not included as scheme assets for the purpose of assessing whether a scheme meets its statutory funding objective (ie that assets are sufficient to cover TPs) until they are transferred to the scheme.

Continuous Mortality Investigation (CMI)

The CMI Mortality Projections, created by the UK Actuarial Profession, are based on a deterministic model driven by user inputs. The model is based on the assumption that current rates of mortality improvement converge to a single long-term rate. The latest version of the model, CMI_2020, was published in March 2021.

Deficit repair contributions (DRCs)

These are contributions made by sponsors to the scheme in order to address any asset to TPs deficit, in line with the Schedule of Contributions and the RP.

Defined benefit (DB)

Benefits are worked out using a formula that is usually related to the members’ pensionable earnings and/ or length of service. These schemes are also referred to as ‘final salary’ or ‘salary-related’ pension schemes.

‘Different rates’

Where separate discount rates are reported in respect of pre-retirement and post-retirement benefits in the valuation of liabilities. (See also ‘Single rates’).

Discount rate

A discount rate is a rate of compound interest which is used to calculate the present value of a sum due at a later time. This action discounts the sum due to its value today. It inherently assumes that the present value is invested and has to earn the chosen discount rate to achieve the sum due at the later time. (See also ‘Single rates’, ‘Different rates’).

Effective date (valuation date)

An actuarial valuation or an actuarial report considers the funding of a scheme as at a particular date, known as the effective date. The effective date will be earlier than the date on which calculations are done. The effective date of a scheme’s first Part 3 valuation cannot be before 22 September 2005.

Part 3 Valuation or scheme funding valuation

An actuarial valuation meeting the requirements of Part 3 of the Pensions Act 2004 concerning the funding of DB pension liabilities, which apply to any actuarial valuation received by trustees (on or after 30 December 2005) that is based on an effective date of 22 September 2005 or later.

Pension Protection Fund (PPF)

A corporate body established under the Pensions Act 2004. The PPF was set up to provide compensation to members of eligible DB pension schemes, when there is a qualifying failure event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of compensation.

Pension protection levy

This is the annual amount that a pension scheme is charged by the PPF. It is composed of a scheme-based levy and a risk-based levy.

PPF Stressed Asset Ratio

The ratio of the stressed value of assets (as per the PPF’s standard stress approach) to the unstressed market value of assets. The standard approach is carried out by the PPF on behalf of schemes that are not required to and do not opt to carry out a bespoke stress. The stressed assets value is used as a measure of investment risk for the PPF levy calculations.

Recovery plan (RP)

Under Part 3 of the Pensions Act 2004, where there is a funding shortfall at the effective date of the actuarial valuation, the trustees must prepare a plan to achieve full funding in relation to the TPs. The plan to address this shortfall is known as a recovery plan.

Recovery plan length

The recovery plan length is the time that it is assumed it will take for a scheme to eliminate any shortfall at the effective date of the actuarial valuation, so that by the end of the recovery plan it will be fully funded in relation to the TPs.

Self-Administered Pension Schemes (SAPS) base mortality tables (includes ‘S1’, ‘S2’ and ‘S3’ series)

Based on mortality experience of UK self-administered pension schemes. In October 2008, the CMI published the ‘S1’ Series; the first mortality tables to be based on UK pension scheme data.

Section 179 liabilities (s179)

This refers to a valuation of PPF compensation benefits under section 179 of the Pensions Act 2004, for PPF levy purposes. This measure is designed to be a close approximation to the liability measure that would be used to decide whether the PPF would need to take on the scheme were the employer to become insolvent. In contrast to TPs, the assumptions to be used in an s179 valuation are prescribed by the PPF and are standard across all schemes. They are designed such that s179 is close to the cost of securing the valued benefits with an insurance company at the valuation date.

Section 179 (s179) valuation

To calculate the risk-based pension protection levy, the PPF board must take account of scheme underfunding. To obtain a consistent basis for determining underfunding, schemes must complete a PPF valuation (section 179). This valuation will be based on the level of assets and liabilities for the scheme. The liabilities will be based on the scheme benefits, taking into account key features of the levels of compensation paid by the board of the PPF, as set out in Schedule 7 of the Pensions Act 2004.

Technical provisions (TPs)

The funding measure used for the purposes of Part 3 valuations (see above). The ‘TPs’ are a calculation undertaken by the actuary of the assets needed at any particular time to make provision for benefits already considered accrued under the scheme using assumptions prudently chosen by the trustees - in other words, what is required for the scheme to meet the statutory funding objective. These include pensions in payment (including those payable to survivors of former members) and benefits accrued by other members and beneficiaries, which will become payable in the future.

The Pensions Regulator (TPR)

A corporate body established under the Pensions Act 2004. The UK regulator of work-based pension schemes, a non-departmental public body established under the Pensions Act 2004.

Tranches

‘Tranche’ refers to the set of schemes which are required to carry out a scheme-specific funding valuation within a particular time period. Schemes whose valuation dates fell from 22 September 2005 to 21 September 2006 (both dates inclusive) were in Tranche 1, from 22 September 2006 to 21 September 2007 were Tranche 2 (both dates inclusive), etc. Because scheme-specific funding valuations are generally required every three years, schemes whose valuations are in Tranche 1 will also be likely to carry out valuations in Tranches 4, 7 and 10.

Short (SC), medium (MC) and long (LC) cohort projections

A number of UK mortality studies have shown that in recent years, the birth cohort of pensioners born around 1926 is, on average, living longer than those born earlier or later (the ‘golden cohort’). In 2002, the UK Actuarial Profession created three different cohort projections which take account of the ‘golden cohort’ effect, each projecting the future of the ‘golden cohort’ differently. The ‘short cohort’ projections assume that the ‘extra’ improvement in longevity experienced by the golden cohort will last, for the most fortunate generation, until 2010 (before reverting to ‘normal’ levels of improvement), the ‘medium cohort’ projections assume the effect will last until 2020 and the ‘long cohort’ projections assume the effect will last until 2040.

Single effective discount rate (SEDR)

A single composite rate and made up of constituents of the different rates reported, allowing approximately for the maturity of schemes. This approach is also used to normalise bases where the discount rate varies year-on-year. Please see the ‘Methodology’ section of this document for greater detail.

Single rates

Where a single discount rate has been reported in respect of the valuation of pre-retirement and post-retirement liabilities.

Standard Industrial Classification (SIC)

A Standard Industrial Classification (SIC) was first introduced into the UK in 1948 for use in classifying business establishments and other statistical units by the type of economic activity in which they are engaged. The classification provides a framework for the collection, tabulation, presentation and analysis of data, and its use promotes uniformity. In addition, it can be used for administrative purposes and by non-government bodies as a convenient way of classifying industrial activities into a common structure.

Triennial valuation cycles (cycles)

Given that all schemes are required to submit a Part 3 valuation to TPR at least every three years, each three year period (three valuation tranches), is referred to as a cycle. Cycle 1 corresponds to the first three valuation tranches (Tranches 1, 2 and 3); Cycle 2 the second three valuation tranches (Tranches 4, 5 and 6); etc. The majority of Cycle 2 plans (Tranches 4, 5 and 6) are second valuations under the scheme funding regime. However, Tranches 1 and 4 (2 and 5, and so on) do not constitute a perfect cohort. See the ‘Data coverage’ section in this document for further detail.

Valuation summary

A form to be completed when a recovery plan and schedule of contributions have been agreed by the trustees and the employer, following an actuarial valuation.

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