UK pension deficit surges to 'staggering' £136bn

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UK pension deficit surges to 'staggering' £136bn

The aggregate deficit of UK defined benefit (DB) schemes surged to a 'staggering' £135.9bn in March, up from £124.6bn at the end of February, latest Pension Protection Fund (PPF) data has revealed.

At the start of 2020 the aggregate deficit figure stood at just £10.9bn, while aggregate asset values plummeted from £1,720.9bn in February to £1,680.5bn in March. AJ Bell said the fall in the value of liabilities over the same period, from £1,845.5bn to £1,816.4bn, helped mitigate the impact.

Tom Selby, a senior analyst at AJ Bell, commented: "As the coronavirus shutdown has forced economies around the world to hibernate and central banks to launch fresh stimulus packages, defined benefit schemes were always likely to be caught in the firing line."

The magnitude of these deficits brings into question the very survival of many company pension schemes and, in order to survive, they might need to consider drastic changes to the terms of employees’ pension schemes."

"Today's figures demonstrate yet another grim reality of the current crisis, with the total deficit of schemes in the UK rising by over £10bn in March. Since the start of the year, the aggregate deficit figure has surged by over £100bn," Selby said.

AJ Bell described the combined deficit of DB schemes as "staggering," having risen to £254.1bn, up from £244.8bn at the end of February.

"While such figures may understandably give the members of DB schemes the jitters, it's worth remembering the most important thing in most cases is not the value of any deficit today but the ability of an employer to survive long enough to pay your pension both now and in the future.

"Furthermore, DB schemes benefit from the safety net of the PPF, so even if the scheme sponsor faces liquidation you should still get a significant chunk of the pension you were promised.

A little leeway
Selby added: "From a company perspective, bigger DB deficits are a problem because they could threaten to divert cash that would otherwise be used to fund growth plans and reward shareholders."

"With DB schemes under severe pressure, the Pensions Regulator stepped in last week to give struggling companies breathing room when paying off deficits.

"Trustees of DB schemes were told they should be ‘open' to requests to reduce or suspend Deficit Recovery Contributions during the current turmoil, while recovery plan submissions and the provision of Cash Equivalent Transfer Values (CETVs) can be delayed by up to three months.

"This flexibility is undoubtedly better than nothing. However, ultimately what DB schemes will really be waiting for is market conditions to turn back in their favour."

Perfect storm
Nigel Green, CEO and founder of deVere Group, said "UK final salary schemes are in the eye of a perfect storm."

Green urged final salary pension members to explore options to mitigate risks to their retirement savings posed as covid-19 adds to the growing pension deficit threat.

"The magnitude of these deficits brings into question the very survival of many company pension schemes and, in order to survive, they might need to consider drastic changes to the terms of employees' pension schemes," he said.

"Therefore, sooner rather than later, they should explore the available options to safeguard their retirement income. With most experts now forecasting a major economic downturn, it will become increasingly difficult to fund pension schemes. It can be expected that some firms will find the true cost of operating them increasingly prohibitive," Green added

The updated TPR guidance is available in full here.

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Christopher Copper-Ind

Christopher Copper-Ind is editor-in-chief of International Investment. Before this, he was editorial director of The Business Year, from 2014 to 2017.