Monday, December 18, 2006

The Purple Book

The UK Pensions Regulator in cooperation with the Pension Protection Fund has issued the first edition of the Purple Book, a comprehensive overview of the British DB pension universe risk profile which is to be updated annually. The overview is based on detailed information of ca. 5'800 schemes which represent about 50% of all schemes or 85% of members. It contains information about scheme demographics, funding, funding sensitivities, insolvency risks, asset allocation and short term risk concentration.

While the aggregate deficit is quoted as GBP 33.8 bio per 31 March 2006, this number needs to be seen in the context of its sensitivities:
  • "A 0.1% point increase (reduction) in gilt yields reduces (increases) aggregate scheme underfunding by around £13bn. A 2.5% increase (reduction) in equity prices reduces (increases) scheme underfunding by around £11bn. A 10% increase in equity markets would eliminate the deficit as would a 0.3% rise in gilt yields.
  • Each year added to the longevity assumption used in the s179 valuation would add 3 - 4% to pension scheme liabilities, raising the deficit by around £20bn."

  • The aggregate asset allocation continues to show a massive concentration in equity (61%), although this has come down from 73% in 1997. The share of UK equity has fallen disproportionately, as shown in the chart.

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