PENSIONSANDSAVINGS.COM

7 August 2013

Here is my latest piece, looking at the recent figures on UK pension deficits.  Firms are still struggling with the effects of QE and continued low interest rates, plus above target inflation.  I hope that Mr. Carney will not overlook these negative effects of low rates, although I fear it is not an issue he will take seriously.

Do give me your thoughts.  Comment below.

• FTSE 100 pension deficits still rising despite strong markets and higher employer contributions
•  Assets increased by £41bn but liabilities rose by £43bn
•  Low interest rates are still damaging pension schemes

 

FTSE100 deficits still rising: The latest pension deficit calculations for the FTSE100 firms show a rise in deficits in the past year to £43billion.

Employers put billions in, markets strong but QE still drives deficits up:  Even though employers ploughed around £20bn into their pension schemes last year, and equities rose by 18%, the damaging impact of continued ultra low interest rates and above target inflation has caused scheme deficits to keep rising.

Firms struggling with pension costs and risk control:  FTSE100 firms with defined benefit pension schemes are struggling to contain the costs and risks of these promises, while the situation is far worse for smaller companies and charities which are unable to afford sufficient contributions to fill their deficits.

Assets increased but liabilities increased by more:  The Report by LCP calculates that although FTSE100 pension scheme assets rose by £41bn from £406bn to £447bn, liabilities increased by £43bn from £447bn to £490bn.  The rise in liabilities has offset the strong asset performance and is further evidence of damage done by QE to UK pensions.

FTSE350 firms’ pension funds hit by shortage of doubleA bonds:  FTSE350 firms are also finding it difficult to control the risks of their pension schemes, with Hymans Robertson pointing out that the shortage of AA corporate bonds, which are used as the discount rate for the accounting valuations of their pension liabilities, now means that they are struggling to find matching assets and that the prices of AA corporate bonds are rising.  This causes significant problems for many firms, because it is estimated that each 0.1% rise in the AA corporate bond yield can lead to a £12bn change in the overall FTSE350 pension deficits.

Ultra-low long bond yields have damaging side effects which are being ignored while small firms and charities go bust and workers’ pensions are reduced:  So far, all the talk is of the benefits of ultra-low bond yields and the merits of negative real interest rates on many maturities.  However, it is important to consider the problems of UK pension schemes and the rise in deficits which is damaging smaller companies and charities.  When these employers fail, all their members will see reduced pensions in the Pension Protection Fund.  This is a hidden cost of current policies.