UK pension funding deficits remain at nearly one-third of UK GDP, despite recovery of £50bn in November 2016 according to Skyval Index

Published at 00:01 AM on 01 December 2016

  • Allowing longer periods to repair pensions deficit could reduce strain on economy
  • For some pension funds, not tackling volatility of deficits could miss practicalities of their obligations and and puts security for savers at risk

New figures released today from PwC’s Skyval Index show the deficit of defined benefit (DB) pension funds improved by £50bn in November 2016, leaving the total deficit at £580bn, still more than £100bn higher since the start of the year. This is according to the funding measure based on the value of liabilities used by pension fund trustees to determine company cash contributions (see notes to editor for definitions on deficit measures).

PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.6,000 DB pension funds.

The current Skyval Index asset, liability and deficit levels of DB pension funds are:

Table

“There are questions around whether the volatility in pension deficit figures is real, and matters.  For some pension funds, it may not matter - the volatility is only there if the situation is monitored frequently and if the measurement method you choose to use tracks volatile market indicators.  Most people’s heart rates will go up and down during the day, but that doesn’t mean there’s always an underlying problem.Raj Mody, partner and PwC’s global head of pensions, said:

“But for other pension funds, the volatility will be an indication of potential trouble.  For example, if asset portfolios are not structured to meet pension benefit payment commitments as they fall due, then pension funds may become a forced seller of assets at a bad time. Or they are storing up trouble for the future without realising it now - like going on a car journey without enough petrol where everything seems fine until you run out of fuel in the middle of the motorway.”

PwC advises pension fund decision-makers to avoid falling into the trap of ignoring volatility or thinking that deficit measurement methods are not important.

Raj Mody added:

“Some commentators have suggested that volatility can be ignored, or how the deficit is measured doesn’t matter. This misses some really important practicalities for how pension funds work, and how to deliver security for savers effectively.  Pension decision-makers and advisers can’t afford to put their heads in the sand and duck the issues just because these concepts are complicated.”

PwC notes that, while pension deficits are large compared to overall GDP, having sensible deficit repair periods can help avoid undue strain on economic growth.  

Raj Mody concluded:

“Pension funding deficits are nearly a third of UK GDP. Trying to repair that in, say, 10 years could cause undue strain, akin to about 3% per year of potential GDP growth being redirected to put cash into pension funds.  This would be like the UK economy running to stand still to remedy the pension deficit situation.

“If the average repair period was 20 years instead, this reduces the annual cash funding strain on sponsoring companies. It also allows the passage of more time to see if pension assets can deliver outperformance in their returns relative to the more prudent assumptions otherwise used in working out funding demands in advance.

“This more measured, and gradual approach, allows time for pension stakeholders to see if assets can deliver the required returns sustainably, in a way which short-term periods of a few years don’t allow. This could ease the cash contribution burden on companies - cash which can otherwise be reinvested in the business or wider economy. In some situations, such an approach may eliminate the need to pay large amounts of cash to the pension fund in advance as the apparent deficit could be mostly eroded by stronger than expected asset returns. Of course, the sponsoring company in question needs to be resilient enough to back this kind of strategy. It is not an approach which will work for every fund and the details would vary according to the individual pension fund situation.”

Ends

Notes to editors

  • Raj Mody is available for interview - please contact Katherine Howbrook on 020 7212 2711/07595 609 737 or katherine.howbrook@pwc.com

Notes on deficit measures:

 

  • Funding: the value of liabilities used by pension fund trustees to determine company cash contributions, calculated on a scheme-specific basis for each pension fund agreed between the trustees and sponsor.
  • Accounting: the value of liabilities shown in company accounts, based on discounting future pension obligations using AA-rated corporate bond discount rates. Pension decision-makers should not rely on the accounting measure, cited by many commentators, to inform their management decisions.  Accounting numbers are calculated according to prescribed standards, and are not designed to be tailored to individual pension fund circumstances.  They serve a purpose for historic formal financial reporting in accounts, but are not in isolation a good basis for deciding the best future strategy for a pension fund's assets and liabilities.
  • Buy-out: the value an insurer would typically place on the fund's liabilities, which depends on prevailing market terms for these kinds of transactions. It is a hypothetical scenario for all pension funds to buy out their total liabilities in one go as there is not enough capital market capacity to support this. The theoretical deficit on such a buy-out basis would be in excess of £1trn.
  • Figures provided have been estimated by PwC and Skyval based on publicly available data of UK defined benefit pension funds, including from the Pensions Protection Fund’s dataset.

 

About Skyval

Skyval is a pensions platform which trustees, sponsors and all advisers can use for their pension scheme, as a single and confidential tool for their scheme-specific funding, investment, analytics and benchmarking requirements.

The Skyval suite of modules includes Skyval Dashboard, Skyval Monitor, Skyval Choice, Skyval Optimiser, Skyval Accounting and Skyval Insure. Skyval helps pension schemes reduce costs, manage risks and make better decisions faster. Visit www.skyval.com, follow @SkyvalOnline or connect on LinkedIn


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