According to pensions expert LCP, in its annual report on the pensions market, by the end of July the deficit was an estimated 46bn GBP. This figure was at 25bn GBP a year ago.
They also report that since the end of July the deficit has widened further to 63bn GBP. The position has deteriorated because of lower bond yields, with a sharp fall after the UK’s vote to leave the EU. But sterling’s fall after the Brexit result appears to have partly offset this effect.
UK COMPANIES SHOULD BE IN STRONG POSITION TO MANAGE UK PENSION DEFICITS
Falling bond yields cause problems for pension funds because they reduce the amount of income available from investments. Bond yields have fallen even further this month in the wake of the Bank of England’s decision to cut interest rates from 0.5 per cent to 0.25 per cent and step up its bond-buying programme in an effort to stimulate the UK economy.
However, at the same time, the fall in the value of GBP has meant that overseas investments by pension funds are worth more in GBP terms. LCP say that companies had also used interest rate hedging to negate much of the impact of falling bond yields.
However, Brexit has highlighted the significance of corporate pension liabilities, according to the report. The collapse of department store chain BHS and the potential sale of Tata Steel‘s UK operations, have also contributed to this.
Since both firms were suffering because of underfunded pension schemes, their plight illustrated the impact that a large defined-benefit scheme can have on a UK company.
Bob Scott, partner at LCP told the BBC that UK companies should be in a strong position to fund their pension liabilities and reduce UK Pension Deficits, given that they are currently paying high levels of dividends. He added that higher funding of defined benefit schemes would mean that pensions of those currently in work would tend to lose out relative to those who had retired.
WILL THERE BY FURTHER CLOSURES?
The position has worsened since February, when FTSE 100 companies briefly had a combined pension surplus for the first time in seven years because of a fall in liability values. But in the ensuing months, liability values increased again and earlier gains were more than offset. However, 57 FTSE 100 companies still allow at least some employees to pay into existing defined-benefit schemes.
LCP say that Legal & General and Marks and Spencer were the only companies to announce they would be closing their schemes to future accrual, or proposing to do so, since last year’s report. They expect to see many more pension scheme closures announced in the coming months and years – unless something is done to make pensions more affordable.