DB pension deficits rise by £90bn in 2016
I expect that 2017 will be the year when pension fund trustees and sponsors reach more informed conclusions about how to tackle their pension deficit and financing strategy.
The deficit of defined benefit pension funds stood at £560bn at the end of 2016, £90bn higher than a year earlier, according to PwC figures.
The research found that if companies tried to repair the additional deficits which arose during 2016 within 10 years, it would cost them an extra £10bn per year.
The EU referendum result had the biggest short-term impact on pension deficits in 2016. Aggregate pension deficits in UK private sector funded DB schemes increased by £80bn from 23 to 24 June, following the EU referendum result.
Pension deficits peaked in late August, at £710bn. Following the Bank of England’s interest rate cut and QE announcement in early August, pension asset values increased by £60bn over the following week, due to significant rises in bond and equity markets, but pension funding targets increased by more than double that amount (£130bn).
Pension funds experienced strong asset performance in the year, but not enough to make up for lower expected future asset returns
Raj Mody, PwC’s global head of pensions, said: “2016 saw huge change and volatility for pension funds, and the start of a renewed debate about how to measure and finance long-term pension commitments.
“I expect that 2017 will be the year when pension fund trustees and sponsors reach more informed conclusions about how to tackle their pension deficit and financing strategy. Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. Defined Benefit pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information.
“Last year we identified that pension funding deficits are nearly a third of UK GDP. Trying to repair that in too short a time could cause undue strain. In some situations, longer repair periods may make sense. This can help reduce cash strain by allowing the passage of more time to see if pension assets outperform relative to the prudent assumptions currently used when trustees calculate deficit financing demands. It’s not necessarily sensible to calculate deficits prudently and then ty and fund that conservative estimate too quickly. Equally, if all parties can get a realistic deficit assessment, it could well be in everyone’s interest to make that good as soon as possible.”
Stan Russell, retirement expert at Prudential, commented: “The increase in the deficits of private sector defined benefits pensions schemes means more schemes might consider closing in the year ahead, with members being offered generous transfer values to transfer out of these schemes. Transfer values of 20 or 30 times annual benefits are not unusual and could be higher as trustees look to reduce deficits and control liabilities.
“Defined benefits transfers worth more than £30,000 must be advised, and are an increasingly important area of business for financial advisers. Since pensions freedoms was first discussed, Prudential has seen a five-fold increase in requests from financial advisers for TVAs reports. These are used by advisers to help determine if a client should transfer out of a scheme, and remain a regulatory requirement. They are often used in conjunction with modelling tools to give a more personal critical yield.
“In general terms, transfers can often make sense if the consumer has other sources of retirement income or is determined to leave part of the pension fund as a legacy. Alternatively, they may just want to exert a greater control over how and when their pension income is paid.”