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Executive summary

Introduction

This year's statistics release is in a different format to previous versions. In July 2011 and December 2011 the regulator released a single document (PDF format) containing the report and data tables. This year we have taken a different approach, releasing the figures in an excel format making the data more accessible for end users to use as they want.

Since the beginning of the scheme specific funding regime one cycle of scheme valuations has been completed and at the time of writing more than half of PPF[1] -eligible Defined Benefit / Hybrid schemes will have completed their second-cycle valuations. 

This June 2012 statistical release follows the December 2010 report on the technical assumptions underpinning recovery plans and the June 2011 report on funding and other forms of scheme security. Like the last two reports, which were based on tranche 4 valuations, the current release reflects the evolution of funding positions from the first to second funding cycle and the key technical assumptions that underpin the trends.

The update is based on 'tranche 5'; that is, recovery plans with effective valuation dates falling on and between 22 September 2009 and 21 September 2010. Due dates for completion of tranche 5 recovery plans fell between December 2010 and December 2011. By 31 January 2012, the regulator had received 1733 plans with tranche 5 valuation dates. The plans in this dataset comprise less than a third of schemes in the PPF-eligible universe as some schemes with tranche 5 valuation dates will be in surplus. 78% of the tranche 5 schemes in this dataset submitted recovery plans in tranche 2. Similarly, tranche 8 (cycle 3) recovery plans submitted in 2013-2014, are expected to largely comprise of tranche 5 plans.

The recovery plan features and assumptions in this release are as at receipt; prior to the regulator's review process and any engagement with scheme trustees arising from reviews. This information presented may be of particular interest to trustees, scheme advisers, and others in the pension industry.

A fuller commentary on the tranche 5 statistics is to follow.

Scheme demographics

Approximately 5 in 6 tranche 5 schemes are closed to new entrants. More than half of tranche 5 schemes have technical provisions ranging between £5m and £99m, while approximately 2 in every 3 schemes have memberships below 500 members.

Scheme security and contingent assets 

Contingent assets continue to be a key form of scheme security. A total of 358 (21%) of tranche 5 schemes reported having some form of contingent asset. The majority of the assets (265) are recognised by the PPF in respect of the levy calculation while the remaining 93 assets are not.  The majority of schemes reporting PPF recognised contingent assets (90%) hold 'Type A' assets (guarantees provided by the parent/group companies to fund the scheme, most commonly guarantees to cover a pre-arranged percentage of liabilities).

Funding

The average (unweighted) funded status of tranche 5 schemes on the technical provisions, s179, and buyout bases is 78.8%, 92.9%, and 57.8% respectively. Technical provisions as a proportion of s179 liabilities was on average (unweighted) 112.5%, while the proportion of technical provisions to liabilities on a buyout basis was on average (unweighted), 73.2%.

Among the 1355 schemes that submitted recovery plans in both tranches 2 and tranche 5, the average level of technical provisions has increased by 15.7%, while the average value of assets has increased by 6.8%.

Triggers

Triggering in tranche 5 plans compared to tranche 4 plans reflect the slightly improved, though still-depressed, economic conditions prevailing at tranche 5 valuations dates. Plans have a shorter duration on average and a lower proportion have triggered on all triggers relative to tranche 4.

The average (unweighted) length of a tranche 5 recovery plan was 8.1 years; just over one year shorter than the average length of tranche 4 plans.

The proportion of schemes triggering overall was 60%, compared to 81% in tranche 4. In comparison to tranche 4, a smaller proportion of tranche 5 schemes triggered on investment return assumptions (15% compared to 34% in tranche 4) and on technical provisions (38% compared to 61% in tranche 4).

Discount rates

The average nominal single effective discount rate (SEDR) for tranche 5 is lower relative to that of tranches 2 and 3. The fall in average discount rates reflects the decline in UK gilt yields since the first cycle of valuations. Similarly, the real single effective discount rate fell to 1.76% in tranche 5, the lowest it has been over the five tranches.

The average nominal SEDR spread over UK conventional 20 year gilt yields increased from tranche 2 to tranche 5 (from 0.84% to 0.93%) although this is still lower than the 1.18% average outperformance in tranche 4.The average outperformance of the real single effective discount rate against >5 year IL gilts has increased from 0.84% in tranche 2 to 1.06% in tranche 5. This is lower than the average of 1.13% in tranche 4.

Schemes with the highest D&B[2] Failure scores (deemed least likely to become insolvent in the next year) had the highest real SEDR in tranche 5 while schemes with the lowest D&B Failure scores had the second highest SEDR.

Mortality

Nearly two thirds (62%) of tranche 5 schemes used 'S1' base mortality tables. 36% assumed a medium cohort projection for future improvements; 28%  long cohort  and 31% CMI 2009 projections. 95% of schemes applied an underpin. By comparison, 73% of tranche 2 schemes used '92' series base tables; 69% and 13% assumed medium and long cohort projections respectively; and 23% applied an underpin.

Average (unweighted) life expectancies increased marginally between tranches 4 and 5 with the average life expectancy of a male non-pensioner currently aged 45 rising from 89.1 to 89.4 years, and that of a male pensioner currently aged 65 rising from 87.1 to 87.3 years.

Changes in mortality assumptions from tranche 2 to tranche 5 translate to an increase of 0.8 years to the average (unweighted) assumed life expectancy of a male pensioner currently aged 65. The corresponding increase in average age for a male non-pensioner currently aged 45 is 1.5 years. It should be noted however, that increases in life expectancies do not necessarily reflect increases in prudence since some increases in life expectancies are included in all projection models.

Footnotes for this section

    [1] Pension Protection Fund

    [2] 'D&B' is the trading name of Dun & Bradstreet Ltd

Methodology

Data conventions 

For each triennial cycle, data is grouped into 3 tranches covering a specific range of valuation dates within the cycle (see Table 1 below).

In this report, a scheme's tranche is based solely on the effective date of valuation; that is, the Part 3 valuation date. This date could in theory differ to the date the valuation should have fallen due. As schemes have up to 15 months after the valuation date to submit a plan, due dates for completion of plans are 15 months from valuation dates.

Table 1 Valuation dates

Tranche Valuation period
Cycle 1 Tranche 1 22 September 2005 to 21 September 2006
Cycle 1 Tranche 2 22 September 2006 to 21 September 2007
Cycle 1 Tranche 3 22 September 2007 to 21 September 2008
Cycle 2 Tranche 4 22 September 2008 to 21 September 2009
Cycle 2 Tranche 5 22 September 2009 to 21 September 2010
  • The second triennial valuation cycle starts with Tranche 4.
  • 'SEDR' is used to denote the single effective discount rate.
  • Averages quoted are unweighted unless otherwise specified.                  

Data coverage

  • The dataset comprises plans received by the regulator up to 31 January 2012.  
  • The data contained in this statistical release was submitted by schemes to the regulator in recovery plans and scheme returns.
  • Tranche 3 schemes received after 31 July 2009 are excluded for the mortality analysis to avoid extensive data processing for a relatively small proportion of schemes. Most of the data received after this date was submitted to the regulator using more recent versions of the valuation summary in which schemes provided actual life expectancies (where they hadnt previously). The current dataset therefore includes 64% of tranche 3 schemes. Past experience has shown data received up to end of July to be representative of the current tranche.    
  • The mortality figures also cover 75% (1476) of tranche 4 schemes. These 1476 schemes formed the tranche 4 dataset for 'Recovery plans: assumptions and triggers' published in December 2010.                
  • The majority of tranche 4 and tranche 5 plans are second valuations under the scheme funding regime. However tranches 1 and 4 (and tranches 2 and 5) do not constitute a perfect cohort. The reasons for submitting a recovery plan in tranche 1 but not tranche 4 (and in tranche 2 but not tranche 5) are several. They include: where a scheme's asset exceeded its technical provisions at the point of its cycle 1 valuation, where a scheme may have wound up or be in the process of winding-up, or where scheme may have transferred to the PPF. Also, some schemes have had their most recent valuations less than 3 years from their previous valuation.
  • The mortality assumptions of current and future pensioners are identical in the majority of cases, and unless where stated otherwise,  the main trends presented are based on current male pensioners aged 65 only.
  • Base data may vary slightly in different sections as a result of data validation and cleaning. Unless otherwise stated however, bases are those set out in Table 1 of the Demographics section.                  
  • The data counts all memberships in schemes with a right to a pension. As some people 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 base for D&B failure scores is smaller in relation to the full tranche base (for all tranches) because D&B scores are not available for all schemes. ('D&B' is the trading name for Dun and Bradstreet trading Ltd).    

Methodology 

  • Weighted averages are weighted by technical provisions.   
  • 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 of fewer than 10 observations.
  • Figure totals may reflect rounding.  
  • Maturity is measured as the proportion of pensioner technical provisions within total technical provisions.    
  • Two approaches are used by pension schemes in respect of the discount rate assumption: a 'single investment return approach' (single rates approach) and 'different investment returns approach' (different rates approach). The former assumes that returns on pre-retirement investments are the same as that of post-retirement investments, while the latter usually assumes that the pre-retirement investment returns are higher than post-retirement investment returns. For the purposes of comparison, in instances where a different rates approach has been adopted, the regulator has constructed a 'single effective discount rate' (SEDR): a composite rate based on the single rate or, where a 'different rates' approach has been adopted, is made up of the constituents of the pre and post retirement rates. 

This is calculated:

Post-retirement rate + ((1 + Pre-retirement rate) / (1 + Post-retirement rate)) -1) * (1 - Pensioner TPs / Total TPs) ^ 0.4 x 0.56. 

(The parameters 0.4 and 0.56 were developed by trial and error to create an approximate methodology which fits a simple formula to the more complex and scheme-specific interaction of maturity and duration. The regulator does not hold sufficient data to reliably make a more accurate calculation on a scheme-by-scheme basis.) 

Pre-release access list

Access to the scheme funding (recovery plan) June 2012 statistics

In addition to staff at The Pensions Regulator (TPR) who were involved in the production of these statistics and staff at TPR, the Department for Work and Pensions (DWP) and the Pension Protection Fund (PPF) involved in quality assurance, the following is a list of job titles and organisations of people who have been granted 24 hours pre-release access.

Job title Organisation
Board The Pensions Regulator
Minister for Pensions Department for Work and Pensions
Statistician Department for Work and Pensions
Private Secretary to the Minister for Pensions Department for Work and Pensions
Policy Lead Department for Work and Pensions
Press Officer Department for Work and Pensions
Chief Executive Pension Protection Fund

Data tables

This year's statistical release for scheme funding (recovery plans) is presented in one excel workbook.

The workbook is divided into 5 sections, each section containing worksheets which contain tables relating to one of the following :

  • Scheme demographics
  • Funding and other security arrangements
  • Triggers
  • Discount rates
  • Mortality assumptions
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