Defined Benefit  

Defined benefit pension deficits remain stable

Defined benefit pension deficits remain stable

Pension scheme deficits remain relatively stable despite political uncertainty with the total UK defined benefit pension scheme deficit at 31 May falling to £183bn, down from £194bn a year ago, according to the JLT Employee Benefits.

According to JLT, total defined benefit assets are currently £1,602bn and liabilities £1,785bn.

Charles Cowling, director of JLT Employee Benefits, said: "For many companies the management of their defined benefit pension liabilities is their single biggest headache.

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"The Pensions Regulator has stated an expectation that where dividends are higher than deficit recovery contributions, it expects to see a ‘relatively short recovery period’.

"This is going to cause some tension in boardrooms and trustee meetings when it comes to agreeing how deficits revealed by 2017 actuarial valuations are going to be financed."

He added this tension will not be eased by the continuing likelihood of the International Accounting Standards Board making a technical amendment to the accounting standard IFRIC14, which has the potential to increase very significantly the liability that a company must show in its accounts for its defined benefit pension scheme.

Mr Cowling said: “So, while markets are calm at present and deficits are relatively stable, defined benefit pension schemes still have much to worry companies and shareholders. Moreover, with a general election and Brexit looming there is still the potential for markets to add to these woes."

Nathan Long, senior pension analyst at Hargreaves Lansdown, advised defined benefit pension members not to be unnerved by short term market fluctuations.

He said: "The fall in gilt yields in the aftermath of Brexit saw pension deficits rise along with concerns for the long term future of some schemes, but a subsequent improvement has seen those immediate fears largely subside.

"Members with worries about the strength of the employer backing their pension may consider transferring, but often the benefits available under the Pension Protection Fund, the government’s lifeboat scheme, make staying put a sensible choice."

Claire Trott, head of pensions strategy at Technical Connection, took a slightly different stance.

She said: “Defined benefit pension deficits are dependent on so many variables that it is difficult to predict what will happen in the future but should we see any significant changes in the markets because of Brexit and the election we could easily see deficits on the rise again.

 “For defined benefit schemes in deficit it is the strength of the company that needs to be considered because they need to remain profitable and able to pay into the scheme to reduce the deficit and maintain the stability of the pension scheme.

"Should the company fail, then the scheme will in all likelihood end up in the PPF and many will see reduced benefits in retirement because of this."

stephanie.hawthorne@ft.com