UK pension fund deficit climbs to £520bn, according to PwC’s Skyval Index

Published at 00:01 AM on 01 March 2017

New figures released today from PwC’s Skyval Index show the deficit of defined benefit (DB) pension funds stood at £520bn at the end of February 2017, a £50bn increase since last month.  The analysis also shows that it will take until 2050 to halve the value of today’s total liabilities (in current monetary terms).

PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.5,800 DB pension funds.  The current Skyval Index figures are:

Feb

The funding measure is the approach used by pension fund trustees to determine company cash contributions (see notes to editor for definitions on deficit measures).

Raj Mody, PwC’s global head of pensions, said:

“A decrease in long-term yields of around 0.1% per annum since the end of January led to an increase in liability values, causing the overall deficit to climb to £520bn. The deficit increase was offset to an extent by a £40bn increase in asset values.

“The DWP pensions Green Paper released last week suggests there is no across-the-board systemic DB pension problem, and also suggests deficits are generally affordable. However, the Green Paper does not address fundamental questions about whether employers should be on the hook at all for deficits which have largely arisen due to external forces, including regulation. Given that, we expect a robust industry response wanting to develop concessions around inflation measures, for example, despite the challenges this presents for member expectations.”

Ends

Notes to editors

  • Raj Mody is available for interview - please contact Katherine Howbrook on 020 7212 2711/07595 609 737 or [email protected]

Notes on deficit measures:

  • Funding: the target used by pension fund trustees to determine company cash contributions, calculated on a bespoke basis for each pension fund, agreed between the trustees and sponsor.

  • The “funding measure without extended allowance for future longevity improvements” adjusts for the following issue: Pension fund trustees typically make an allowance for life expectancy to continue to improve a very long time into the future. However, these pension payments are not yet a commitment - they are just a prudent expectation of what might unfold over the next few decades.  Example: If a man aged 40 today is projected to live to 85, but that ends up looking more like 90 thanks to medical or health improvements, that extra commitment isn't going to be due until 45 years from now.  Similarly, a woman aged 40 now may be expected to live to 87, but could eventually live to 91.  Those extra years of pension in 50 years time, in this example, may not need to be pre-funded now. This adjusted funding measure recasts the deficit by removing this additional allowance for life expectancy improvements, which haven’t yet happened.

  • Accounting: the target value of liabilities shown in company accounts, based on formal accounting standards which assume asset returns in line with AA-rated corporate bond yields. Pension decision-makers should not rely on the accounting measure to inform their management decisions.  Accounting numbers not designed to be tailored to individual pension fund circumstances.  They 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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