5th September 2016Pension Funds: Mind the gap!

A Commons Select Committee report into pension provision at BHS found a £571m funding shortfall in its final salary pension scheme. The scheme was subsequently taken over by the Pension Protection Fund (PPF), and although this means those who have retired should get 100 per cent of their benefits, those who haven’t yet retired are likely to receive less income than they had expected in retirement. The PPF provides protection for 90 per cent of benefits up to a cap set at £37,420 for 2016.

The overall deficit of the nearly 6,000 schemes covered by the PPF was £302.1bn at the end of March. That’s slightly less than the £322.8bn recorded at the end of February, but significantly worse than the previous year when the deficit was £244.2bn.

Research in 2015 showed that FTSE 100 companies put more than twice as much into Defined Benefit schemes as they did into Defined Contribution schemes – £13bn compared with £6bn – and the gap has widened in recent years.

In another recent report highlighting the pressures faced by retirement schemes, findings show that in 2015, FTSE 100 companies paid five times more in dividends than they did pension contributions, paying £71.8bn to shareholders and £13.3bn towards their defined benefit pension funds.

A problem for the future

A study undertaken in 2015 by the Pensions Institute, part of Cass Business School, found that out of 6,000 final salary schemes, some 600 are expected to become insolvent in the next five to ten years, and a further 400 will struggle to survive unless they manage to offload their pension obligations.

The Pensions Institute points to quantitative easing, low interest rates and low yields on gilts as significant factors exacerbating the problem.

The Brexit effect

Commentators have been quick to voice their concerns that the UK’s decision to leave the EU spells further bad news for the UK’s Defined Benefit pension schemes. Low interest rates, uncertainty that might persist for a couple of years or even longer as the UK extricates itself from its EU partners, and volatility in global markets could all depress fund values.

All this could mean many more workers at risk of seeing their pension benefits reduced due to their schemes becoming unaffordable to the businesses providing them.

New ways to evaluate future benefits

With more than 11 million workers reliant on Defined Benefit pension schemes, new ways for company pension schemes to calculate the cost of future pension undertakings are being reviewed by the government in an attempt to ease the pressure of rising deficits.

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