DB Plans – officially a “legacy from the past”?

January 8, 2015 Categories: Pension Insights

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In December, the 40th NAPF Annual Survey revealed that, for the first time, active membership of DC schemes outnumbers that of DB schemes in the UK workplace. That crossover has long been expected, and its arrival has been hastened by auto-enrolment swelling the ranks of DC members.

But it is startling nonetheless, coming as it did at the end of yet another annus horribilis for DB pension funds. By end November 2014, falling interest rates had turned the small surplus at the start of the year into a £221.1bn deficit on the PPF7800 Index of defined benefit schemes.

Many funds I talk to have identified when their crossover moment is likely to happen, because it marks a major milestone in the journey of the DB plan into the status of ‘legacy from the past’.  Not only are most of the liabilities from past employees, but now the plan is relevant only to a minority of the current workforce.  Yet the burden of repairing any remaining deficit will fall on all.

It is abundantly clear that plan sponsors want to be shot of this risk to their prosperity.  However, as I have blogged about previously, they need to repair deficits first and until they do that they can’t afford to derisk.  The data shows that allocations to riskier, growth-oriented assets have stayed broadly level for around 5 years now.

And so we face into 2015 with deficits to repair, yet again, and an ever sharper sense of the need to manage risk.  But 2015 isn’t going to give us any easy answers, and indeed has got off to a rocky start.  As my colleagues set out in their 2015 annual market outlook, central banks are moving in different directions, equity market valuations vary by region, and the macro outlook is shrouded in uncertainty.

So 2015 is a year when I believe active investment choices will matter – managing your portfolio dynamically across the divergent markets across the globe – not only for return, but crucially also to manage risk. Strategy is an essential guide, but now more than ever management matters too.

Sorca Kelly-Scholte – Managing Director, Client Strategies & Research, EMEA

Sorca Kelly-Scholte

 

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