Companies need £10bn extra a year to fund Brexit pensions hole

Companies will need an extra £10bn a year over the next decade to fund the pensions gap created by the Brexit vote, according to the PwC’s Skyval Index.

Figures published by the index show that the defined benefit pension deficit stood at £560bn at the end of 2016, £90bn higher than at the start of 2016.

The index revealed that following the UK’s vote to leave the European Union, the aggregate pension deficit in the private sector of DB schemes increased by £80bn from 23 June to 24 June. However, it was in last August 2016 when pension deficits peaked at £710bn.

In addition, following the Bank of England’s interest rate cut and QE announcement in early August 2016, pension asset values increased by £60bn over the following week, due to significant rises in bond and equity markets, but pension funding targets increased by more than double that amount (£130bn).

Commenting on the results, PwC global head of pensions Raj Moody said that the huge change and volatility for pension funds in 2016 renewed debate about how to measure and finance long-term pension commitments.

“I expect that 2017 will be the year when pension fund trustees and sponsors reach more informed conclusions about how to tackle their pension deficit and financing strategy. Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information. There is a need to understand the cashflow profile of the fund year-by-year, not just summarised figures. While the aggregate deficit for DB pensions appears to have deteriorated considerably over 2016, the impact for individual funds will vary.”

Mody added: “Gilt yields have long been the foundation of pension deficit measurement and financing, with a belief that calibrating everything to current market expectations was the best version of the truth. This may have been ‘good enough’ as an approach in more benign market conditions, but it does not necessarily make sense to fix your strategy for the next couple of decades based on the situation at any single point in time. Now is the time for pension fund trustees to ask whether the current management information and analytics they receive is fit-for-purpose for all the decisions they need to make.”

PwC noted that, if companies aim to repair their pension deficits over 10 years, they will have to find an extra £10bn of funding per year to do so, because of the new deficit built up over 2016. Having longer deficit repair periods in appropriate cases can help avoid undue strain on companies and economic growth.

“Last year we identified that pension funding deficits are nearly a third of UK GDP. Trying to repair that in too short a time could cause undue strain. In some situations, longer repair periods may make sense. This can help reduce cash strain by allowing the passage of more time to see if pension assets outperform relative to the prudent assumptions currently used when trustees calculate deficit financing demands. It’s not necessarily sensible to calculate deficits prudently and then ty and fund that conservative estimate too quickly. Equally, if all parties can get a realistic deficit assessment, it could well be in everyone’s interest to make that good as soon as possible,” Mody concluded.

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