Company pension deficits up £89bn in a month

Posted on July 12, 2016

BENALMADENA, SPAIN - MARCH 17: People walk on the promenade on March 17, 2016 in Benalmadena, Spain. Spain is Europe's top destination for British expats with the southern regions of Costa del Sol and Alicante being the most popular places to live. The EU Referendum will be held on June 23, 2016 and only those who have lived abroad for less than 15 years will be able to vote. Some in the British expat communities in Spain are worried about that Brexit would see changes made to their benefits. The latest reports released by the UK Cabinet Office warn that expats would lose a range of specific rights to live, to work and to access pensions, healthcare and public services. The same reports added that UK citizens abroad would not be able to assume that these rights will be guaranteed in the future. (Photo by David Ramos/Getty Images)©Getty

The pension deficit of UK companies grew by £89bn in just one month, hitting a record level following Britain’s vote to leave the EU.

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 plunge in equities, sterling and bond yields put more strain on schemes that are already under pressure from a prolonged period of low interest rates.

    “UK pension scheme funding has never been in a more perilous state,” said Andy Tunningley, head of UK strategic clients at BlackRock.

    “A significant slowdown in UK growth and material likelihood of a recession next year could threaten the financial outlook of pension scheme sponsors. We have halved our UK real growth forecasts to 1 per cent per annum for the next five years.”

    About 84 per cent of pension funds are in deficit, according to the PPF, the lifeboat created 12 years ago to safeguard pensioners’ rights. The remaining 16 per cent have a total surplus of just £37.4bn, a fraction of the total deficit.

    £383.6bn

    UK private sector pension shortfall in June

    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 per cent, while a two-year gilt yield has briefly turned negative.

    A 0.1 per cent reduction in gilt yields raises aggregate scheme liabilities by 2 per cent and aggregate scheme assets by 0.5 per cent, 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 tough, with the FTSE-All-Share index falling almost 10 per cent over the past year.

    “The UK’s gold-plated pension system is starting to look tarnished,” said Tom McPhail, head of retirement policy at Hargreaves Lansdown.

    “Deficits are soaring, employers are reneging on their promises and still more money is needed. Companies are having to divert profits into schemes to make good on their promises, which means less investment capital to help businesses grow,” he added.

    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.

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