A link between underfunding in DB schemes and investment risk has been revealed in The Pension Protection Fund's (PPF) latest The Purple Book, although the overall trend for de-risking has continued.

In its 14th edition of The Purple Book, the PPF revealed that while only 24 per cent of DB scheme assets are now invested in equities, compared to 27 per cent in 2018 and 61 per cent in 2006, underfunded schemes continue to be invested “heavily in equities”.

Overfunded schemes were found to have, on average, 69 per cent of their assets in bonds, compared to just 25 per cent for those with a funding ratio below 50 per cent.

The report has also highlighted that whilst the funding ratio of all schemes has improved, from 97 per cent in 2018 to 99 per cent in 2019, 57 per cent of schemes remain in deficit, with a combined deficit of £160bn.

PPF chief risk officer, Stephen Wilcox, commented: “While many schemes have reduced their investment risk, the deficit of schemes in deficit is more than double what it was in 2006 and the economic circumstances much less favourable.

"The funding ratio of schemes in deficit is particularly vulnerable to economic shock."

The year to 30 June 2019 also saw £37bn worth of risk transfer deals, with 2019 expected to surpass the £28.9bn worth of transactions seen in 2018.

The increasing trend towards risk transfer deals has also seen the overall DB ‘universe’ shrink over 2019, with the number of schemes falling by 100 to 5,436 (5,524 in 2018), and the number of members decreasing to 10.1m in 2019 (10.4m in 2018).

Furthermore, remaining eligible schemes are increasingly less active, as the number of active members in The Purple Book dataset has fallen by 14 per cent over the year, and the percentage of schemes open to new members has fallen to 11 per cent (12 per cent in 2018).

Eighty per cent of remaining schemes now have under 1,000 members and 74 per cent have assets under £100m.

Commenting on this trend, PPF chief actuary, Lisa McCrory, said: "The long tail of small, underfunded schemes is a particular concern. Fifty-eight per cent of schemes with 100-999 members are less than 75 per cent funded.

“Our focus is to manage our own funding prudently, to manage our balance sheet effectively and to understand the risks we face. At this stage of our evolution, a probability of success around 90 per cent indicates a high level of confidence that we are on track to meet our funding target.”

The PPF probability of success, calculated using the long-term risk model to estimate the chance the PPF will achieve its funding objective, has fallen slightly to 89 per cent, despite an overall improvement in the PPF funding position.

The lifeboat attributed the fall to “expectations of what the future holds”, assuming a neutral impact of specific uncertainties such as the Bauer case and Brexit.

The report also found that average recovery plan payments are expected to decrease by approximately 80 per cent over the next decade, from £14bn in 2019 to an estimated £2.7bn in 2029.

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