The insolvency rate of sponsoring employers with defined benefit plans that are eligible for inclusion in the U.K. Pension Protection Fund fell sharply over the nine months ended March 31, said Stephen Rice, chief actuary at the PPF.
Figures in the latest Purple Book — which covers U.K. pension funds and their risks, and is published by the PPF and the U.K.'s The Pensions Regulator — show that the national insolvency rate has been falling gradually over the past two years. It also shows that the insolvency rate of the PPF universe increased less than the national insolvency rate around 2008's financial crisis.
Sponsoring employers pay a PPF levy to make them eligible for entry into the PPF, which takes on the benefit payments to employees in the case of an employer insolvency.
Addressing the issue of PPF claims and sponsor insolvencies, Mr. Rice said the PPF is watching numbers of insolvencies carefully. “We certainly don't feel as though, for future claims, we are out of the woods yet,” he said.
One of the contributing factors, said Andrew McKinnon, chief financial officer at the PPF, is the “continuing low interest rates,” although Mr. McKinnon said that “doesn't quite explain why (insolvency rates) should tail off.”
The Purple Book, which covers 6,057 pension funds in the U.K. — mostly in the private sector — also showed that allocations to fixed income had fallen to 44.1% as of March 31, down from 44.8%. It had, the PPF and TPR noted, been on an upward trend since 2006, when the allocation was 28.3% on average.
Executives at the PPF noted a continued slowdown in derisking. “DB sponsors are continuing to derisk,” but there has been a “slowdown, potentially signaling the end of a long-term trend,” Mr. McKinnon said.
Mr. Rice said the PPF had also noted a “tailing off” of the use of contingent assets, which a sponsoring employer will allocate for the pension fund's use for funding in the event of an insolvency. Certain eligible contingent assets earn the sponsoring employer a reduction in its levy payment.
While the number of instances contingent assets were used in pension funds has continued to rise, it is at a slower pace. The Purple Book shows the number of instances of contingent assets recognized by the PPF for the 2014-'15 levy year was 780, down from around 800 a year previous.
“The reason, I think, is we at the PPF have been tightening up on the assets allowed,” Mr. Rice said.
The ninth edition of the Purple Book is available on the PPF's website.
