We base our indices on the monthly PPF 7800 Index from the Pension Protection Fund. All of the UK’s 5,318 Defined Benefit schemes are required by law to submit information to the PPF every year. This makes it the best publicly-available source of UK DB pension scheme asset and liability data.
To this we add data taken from the Purple Book, published jointly by the PPF and The Pensions Regulator. Published annually, the Purple Book reports on all asset classes that pension schemes invest in.
We leave the asset data unchanged. However we do modify the liability values, and for good reason. Firstly, we allow for full scheme benefits, rather than reduced PPF benefits. Secondly, the PPF 7800 Index values a pension scheme’s liabilities on the basis set by the PPF assuming the employer became insolvent and the scheme entered the PPF. This is based on gilt yields.
With the FAB Index, by contrast, First Actuarial values liabilities using a discount rate which reflects the assets that the schemes actually hold. We then make a reasonable assumption about the future returns of those asset classes. And in our view, it’s reasonable to assume that ‘growth’ assets such as equities will return more than gilts in the long term.
We reflect that by using a higher discount rate. Every month we calculate our best-estimate discount rate. We look at market yields at the end of every month, and using the asset splits we calculate a weighted average best-estimate expected return.
To produce the FAR Index, we also use this data to calculate the discount rate needed to make the value of the liabilities equal to the value of the assets. If the assets achieve this level of return, then in the long run schemes will be fully funded in aggregate.