THE deficit of UK pension schemes has risen to a new record high of £945bn as a direct consequence of the Bank of England’s decision to cut interest rates to 0.25 % and introduce a new £60bn programme of QE.
The combined liabilities of defined benefit pension schemes – those paying out an amount directly linked to final salary – leapt £70bn from the previous day’s figure of £885bn, according to actuaries Hymans Robertson.
Patrick Bloomfield, partner at actuaries Hymans Robertson said: “The QE package announced by the MPC hadn’t been entirely priced in to markets. That’s why today we’ve seen record lows in gilt yields leading to pension liabilities increasing by £70bn to £2.4 trillion, reaching record highs. The UK DB deficit now stands at a new record high of £945bn.”
Rising scheme liabilities are putting some companies at risk of insolvency and endangering the security of members’ benefits but there were also many schemes with robust funding plans that will be able to ride the expanding funding gap.
Many schemes run by FTSE350 companies are however seriously underfunded.
Liam Mayne, associate at Barnett Waddingham, said: “The announcement which will be extremely unwelcome news to trustees and sponsors of DB pension schemes alike. The bonds those pension schemes need to buy to match their cashflows continue to shoot up in price to now record levels, and many will have seen yet further increases to deficits in pension schemes that continue to place a massive strain on UK plc.”
Barnett Waddingham said in the seven years to 2015 the net dividends paid by FTSE350 companies which sponsor DB schemes was around £350bn. In contrast however, just around £70 billion was paid into DB schemes to reduce funding deficits.
The Pensions Regulator has urged trustees to look at the balance between dividend payments and deficit contributions and finance directors will need to carefully consider this trade-off.
At current contribution rates, it would have taken four years on average for UK companies with European parents to clear the funding gap in their DB schemes. With deficits on the rise and contribution rates not keeping pace, “we can expect this horizon to appear much further away,” Mayne said.
Andy Hart, Head of Investec's Asset Finance Group and James Arnold, Head of Investec Corporate Treasury, discuss how to manage foreign exchange risk after Brexit
Karan Lal of REL explores the impact of Brexit on working capital, and how businesses can adapt to a new economic environment in the UK
Christian Kourtis of Gowling WLG explores how regulation and taxation could damage the popularity of existing digital currencies
Total fundraising in the second half of 2016 increased by 47%, according to the analysis