Deficit fall masks future problems

2 Aug 2017

The aggregate deficit among defined benefit (DB) pension funds shrank by £40bn during July, new figures from PwC have shown.

PwC’s Skyval Index found that the UK’s 5,800 DB schemes had a collective £420bn black-hole last month, which is around 9% lower than the figure recorded at the end of June.

This is the third successive month that the deficit has improved and means that the assets owned by the UK’s DB schemes cover around 79% of their liabilities, its highest point since autumn 2014.

However, the £420bn deficit is deeper than it was three years ago, in monetary terms.

PwC’s chief actuary Steven Dicker said that this is due to schemes not being hedged against gilt yields slumping to historically low levels.

“However, while this hedging would have reduced the disclosed deficit on the ‘gilts plus’ funding approach, it is important to realise this wouldn’t necessarily improve the actual long-term out-turn for schemes,” he added.

Over 12 months the deficit for all private sector retirement schemes as measured by IAS19 standards narrowed by £75bn to £183bn, JLT Employee Benefits points out. This has seen funding levels reach 90%, up from 85% over the year.

But JLT Employee Benefits director Charles Cowling (pictured) said these figures hide some major problems.

“In recent days we have seen both Barclays and the massive USS pension scheme for university staff announce significantly increased funding deficits in their DB schemes,” he added.

“And it is the trustees’ funding deficit that drives contribution demands on companies. Those companies and pension schemes currently carrying out their three-yearly actuarial valuation are likely to see significant increases in funding deficits and hence considerable demands for cash contributions.”

Worse still are the potential accountancy changes that could see companies report greater pension liabilities, which Cowling believes could “add tens of billions of pounds of additional liabilities on to the balance sheets of UK companies”.

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