Brexit and QE: taking a toll on Britain’s ailing pension schemes

by James Isola | 18th October 2016

Pity your poor pension scheme trustee as they battle with a gaping deficit that seems to be getting ever worse. PWC’s Skyval index, which measures the combined deficit of all the UK’s 6,000 pension funds, shows the gap widened by £100 billion in a single month- to £710bn. That’s almost a third of the UK’s economy.

 

It’s no surprise that more and more companies are closing defined benefit schemes and putting their workers into defined contribution plans, where the employee bears all the risk. The alternative is to cough up more cash to try and plug the hole.

The reasons for this happening are well documented: pensioners are living longer and investment returns are weaker.  But is the Bank of England making matters worse?

Theresa May might have had a point when she recently lamented the negative side effects of the central bank’s programme of quantitative easing, as the resulting low interest rates mean less money for (often older) savers. But experts fear that QE is also wreaking havoc with companies’ pension funds, by depressing the bond yields that pension accounting dictates must be used to discount pension liabilities. Put simply, a lower yield means a bigger liability.

Various governments haven’t helped along the way. Gordon Brown’s pension tax raid on dividends is reported to have sucked out over £100bn since it was introduced in 1997. Regulations have pushed schemes to invest in bonds over equities- considered a less risky investment, but yielding lower returns.   And savers have been disincentivised by constant tinkering of the lifetime allowance.

All this matters. Not only are pensioners worse off, but companies with gaping pension deficits have to shovel in more money to close the gap. Diverting money in this way means there’s less for pay rises, for new investment, for hiring. There’s also less money for dividends- as plastics company Carclo demonstrated last month.

Pension experts Hyman Robertson estimate that post the Brexit vote, the cost of providing a DB scheme has surged to 50% of pay.

What’s the solution? Clearly we will all have to work much harder.. for longer.. and squirrel more away for our twilight years. Having said that, a plunging pound could provide some respite. Whilst the resulting higher inflation may push up our cost of living, rising bond yields should ease the pressure on hard-pressed pension funds. As they say, every cloud has a silver lining.

 

About the Author

James Isola

jisola@maitland.co.uk

James focuses on financial services, particularly asset management, as well as resources and telecoms. He also specialises in providing media and presentation training for clients

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