PensionsJan 24 2017

UK pension deficits rise by £90bn in 2016

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UK pension deficits rise by £90bn in 2016

UK companies will require an extra £10bn per year for the next decade just to fund the pension deficits built up in 2016 alone.

PricewaterhouseCoopers’ (PwC) Skyval Index has revealed a £90bn increase in UK pension funding deficits in 2016, with the EU referendum result producing the most significant impact.

Deficits increased by £80bn on the day following the result, the study found. The week following the Bank of England’s August interest rate cut and monetary easing measures produced a further £60bn jump, with pension funding targets rising by £130bn over that period.

However, separate figures from JLT Employee Benefits suggest many of the UK’s biggest firms could cope with the problem simply by switching their focus from dividends.

FTSE 100 companies paid out £68.5bn in dividends in the year to June 2016 compared with £13.2bn in pension contributions. JLT said almost half of such firms could clear their pension deficits by redirecting a single year’s dividend.

Kate Smith, head of pensions at Aegon, believes that more partial transfer flexibility may also help to ease some of the issues surrounding DB schemes, despite the likely pushback from the industry. 

Ms Smith said: “At the moment it’s all or nothing. With partial transfers, the risk might be less and members would be leaving part of their benefit behind as guaranteed income or guaranteed benefit within the scheme.

“It could also help with funding DB pension schemes if enough people did it because you find that a lot of people are put off from transferring because they’re very cautious about the risk.”

Ms Smith suggested a re-think of the FCA’s rules on final salary to DC transfers, which are still deemed unsuitable for members in light of the pension freedoms. 

“Post-pension freedoms, more people do want to do DB to DC transfers, and many people who transfer out of DB to DC are not actually buying an annuity with all that money,” she said. 

kuba.shandbaptiste@ft.com