13 Jul, 2016
UK company pension deficits rise
The pension deficit of UK companies increased by £89bn in just one month, hitting a record high after the UK voted to leave the EU in the referendum.
Figures from the Pension Protection Fund showed the total private sector pension shortfall rose to £383.6bn at the end of June, from £294bn a month earlier, as financial markets reacted to the Brexit vote.
The nosedive in equities, sterling and bond yields has put more strain on schemes that are already under pressure from a continued period of low interest rates, deVere Group reports.
Around 84% of pension funds have a shortfall, according to the PPF, the lifeboat created 12 years ago to safeguard pensioners’ rights. The remaining 16% have a total surplus of just £37.4bn, a fraction of the total deficit.
The PPF’s calculations are based on the cost of taking over the schemes and paying out reduced benefits to members.
In a sign of the recent pressure on schemes, the fund is bracing itself to take over the BHS retirement fund, after the retailer collapsed this year, and the British Steel Pension Scheme. Between them these schemes have up to £1bn in liabilities and 150,000 members.
Since the UK voted to leave the EU, gilt yields have plunged to record lows as investors have sought haven assets and expectations have grown of further Bank of England easing.
On Tuesday, the 10-year gilt yield touched a record low of 0.71%, while a two-year gilt yield has briefly turned negative.
Battle lines are being drawn over the growing issue of defined benefits liabilities.
A 0.1% fall in gilt yields raises aggregate scheme liabilities by 2% and collective scheme assets by 0.5%, according to the PPF.
Government bond yields around the world have followed a similar trajectory, with Swiss bond yields turning negative out to 50 years, and Japanese and German bond yields both turning negative past 10-year maturities.
Performance in equity markets has also been difficult, with the FTSE-All-Share index plummeting nearly 10% over the past year.
Citi strategists have warned that the UK’s widening pension deficit gives the Bank of England a headache when it considers what monetary stimulus is appropriate to prop up the economy in the wake of the Brexit vote.