Private pension deficit hits £500bn

In the space of three months, the pensions deficit has reached “dizzying heights”, which the Jardine Lloyd Thompson group blamed on the aftermath of the Brexit vote and the Bank of England’s latest round of quantitative easing.

According to JLT, the deficit now tops £500bn, a marked increase against the previous record high of £300bn reported back on 1 June, and double the figure reported on 31 August last year when it stood at £249bn.

Charles Cowling, director of JLT Employee Benefits, said the deficit has forced companies to reassess whether they are still able to pay dividends to shareholders.

This comes as a stinging report from Lane Clark & Peacock revealed the UK’s biggest companies paid five times more in dividends than in staff pension contributions last year.

“To make matters worse, it is likely that the deficits which pension scheme trustees are dealing with will be even greater than those recorded in company accounts,” Mr Cowling said, pointing out trustees have to be even more prudent when it comes to assessing liabilities.

“Companies and trustees looking at 2016 actuarial valuations or anticipating 2017 actuarial valuations are looking at numbers, on the question of how to solve the deficit situation, which cannot be made to add up.”

None of these choices are particularly palatable, but doing nothing is not an option Charles Cowling

While some have called for changes in how pension scheme liabilities are calculated in a bid to alleviate the deficit, Mr Cowling said changing how the problem is measured will not address the underlying causes, which is that pensions have been promised which can no longer be afforded.

“We are now faced with the situation where there are only difficult choices to be made.

“Uncomfortable as it may be, pension benefits could be reduced, or alternatively, we would need to see a very significant increase in employer contributions, which would lead to substantial reductions in payments to shareholders.”

He said, while none of the choices are particularly palatable, doing nothing is “not an option”.

JLT has updated its monthly index, showing the funding position of all UK private sector defined benefit (DB) pension schemes under the standard accounting measure.

As at 31 August 2016, JLT estimates the total DB pension scheme funding position as follows:

katherine.denham@ft.com