DB scheme investment in bonds continues to rise as equity interest falls

The proportion of defined benefit (DB) scheme assets invested in bonds has continued to increase in the past year, whilst the proportion invested in equities has fallen to 19 per cent, according to the Pension Protection Fund’s (PPF) latest Purple Book

The report suggested that the best funded schemes tended to have the greatest proportion of their assets invested in bonds and a smaller proportion in equities, although it also noted that, as scheme maturity increases, the proportion of assets in equities falls.

In particular, The Purple Bookrevealed that, as of 31 March 2021, the aggregate proportion of schemes’ assets invested in bonds had increased to 72 per cent, up from 69.2 per cent in 2020 and 28 per cent in 2006.

Within bonds, however, the proportions held were “broadly unchanged” from 2020, with index-linked bonds proportion increasing slightly from 46.1 per cent to 47.2 per cent.

The corporate bonds proportion also increased slightly from 28.0 per cent to 28.2 per cent, while the government fixed interest bonds proportion fell from 25.9 per cent to 24.6 per cent

Equities, meanwhile, have seen a gradual long-term decline, with 19 per cent of aggregate proportion of schemes’ assets invested in this class, compared to 20 per cent in 2020 and 61 per cent in 2006.

Within equities, the UK-quoted proportion fell from 13.3 per cent to 11.6 per cent, while the overseas-quoted proportion decreased from 69.0 per cent to 68.3 per cent, and the proportion of unquoted/private equities increased from 17.7 per cent to 20.1 per cent.

In relation to risk reduction, the report found that the total number of contingent assets submitted to the PPF for the 2021/22 levy year had fallen from 395 in 2020/21 to 317, with PPF attributing this to a reduction in the number of type A contingent assets.

It also found that, based only on current recovery plans in place, total annual recovery plan payments are expected to fall by around 94 per cent over the next 10 years as schemes increasingly become fully funded on a technical provisions basis.

The rate of decrease is expected to be similar between different scheme sizes and, in aggregate, with annual recovery plan payments set to fall from around £12.2bn in 2021 to around £0.8bn in 2031.

The number of schemes in PPF assessment increased during the year, from 80 to 87, although the value of liabilities in PPF assessment fell from £13.6bn to £9.4bn.

More broadly, the report showed that a total of 5,220 pension schemes remain eligible for PPF compensation, down from 5,327 in 2020, with the number of members also falling from 9.9 million to 9.7 million.

Of these schemes, 5,215 were included in the Purple Book dataset, with around 11 per cent of these remaining open to new members, consistent with 2020, while the number closed to new members but open to new benefit accrual fell slightly from 41 per cent to 39 per cent.

The proportion of schemes closed to all benefit accrual rose from 46 per cent to 48 per cent.

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