UK DB Schemes — Capital Efficiency and Leveraging “Growth” in Investment Portfolios — Backtested

Senior Investment Strategist

Data from the Pension Protection Fund’s (PPF) purple books over the past five years show that private sector UK Defined Benefit (DB) schemes in aggregate are progressing further along their journey toward their endgames. Indeed, aggregate funding ratios improved from 85.8% in March 2016 to 94.9% in March 2020, and the latest update for the PPF 7800 Index shows the March 2021 number at 102.0%.

Whilst the aggregate results are encouraging, disaggregating the data reveals that there is significant dispersion in funding ratios. In other words, many schemes are still closer to their opening and middle games than their endgames. This is especially true when we realize that the s179 funding level calculation is based on the compensation that schemes would receive if they were transferred to the PPF, whereas funding levels based on schemes’ actual goals such as self-sufficiency or insurance buyout are lower. Thus, figures based on s179 funding levels overestimate the number of schemes nearing their endgames.