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Pension schemes recover lost value

Final salary funds boosted by shares rally

The Pension Protection Fund (PPF), the ‘lifeboat’ that rescues failed schemes, has reported that the overall funding position of 7,400 defined benefit pension schemes is positive for the first time for almost two years. Many individual schemes remain under-funded but most are improving.

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Defined benefits

Defined benefit (DB) schemes are those that promise to pay out a guaranteed income in retirement, normally based on final salary. In recent years, many of these schemes have been shut down and replaced by defined contribution (DC) schemes, where retirement income is more closely linked to the investment performance of a personal pension pot.

The Pension Protection Fund tracks the estimated funding position of 7400 DB schemes. At the end of March 2010, aggregate funding showed a surplus of £0.3bn, compared to a deficit of £15.1bn at the end of February. This is the first time the PPF 7800 index has been in surplus since June 2008. 

Continuing deficits   

Despite the general improvement, 5,032 schemes are still in deficit (68.5%), while 2,310 (31.5%) are in surplus. The level of deficit is falling however and the scale of surplus rising. Over the year to March 2010, scheme assets increased in value by 21.7%, while the FTSE All Share Index rose by 46.7%.

Pension lifeboat  

Final salary schemes are protected by the PPF and those that fail are rescued by the ‘pensions lifeboat’. Pensioners of failed schemes that are covered by the PPF receive a percentage of the pension they would have been entitled to, capped at a certain level. The PPF is funded by an industry levy on the schemes it covers.  

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