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The Purple Book by the Pension Protection Fund

This week saw the publication of the latest edition of The Purple Book. This book is published jointly by the Pension Protection Fund (PPF) and the Pensions Regulator and monitors the risks faced by private sector pension schemes in the UK, particularly defined benefit schemes. Such schemes are also known as final salary schemes as the pay-out depends on the scheme member’s final salary at retirement.

The book seeks to highlight trends in pension fund investment, such as scheme funding and asset allocation, as this plays a large part into whether or not UK pension schemes are on target to meet their pension liabilities.

The book, now in its seventh edition, is important as fluctuations in such risks will have a direct impact on the PPF. The PPF was established to protect the members of eligible UK pension schemes when such schemes find themselves insolvent.

The Purple Book 2012 itself takes into account 6,316 schemes, representing approximately 12 million members.

Findings of the book show that the funding ratio of UK pension schemes (scheme assets divided by scheme liabilities) worsened in the year to 31 March 2012. In addition the number of schemes open to new members continues to fall.

This publication comes in the wake of the recent announcement from the Financial Services Authority (FSA) that the projected rate of investment returns firms use for projections of pension plans are to be reduced.

The current rates of 5%, 7% and 9% are to be cut down to a more realistic projection rate of 2%, 5% and 8%.

This mitigates the risk of pension plan customers being provided with potentially misleading information as the old rates were much less likely to be borne out in reality, especially in today’s economic climate.

The new rates will come into effect from April 2014.