Defined benefit pension schemes nurse £260 billion losses

Pension providers face tough task to make up the lost money and not penalise retirees or existing workers.

Retirees are facing uncertainty if they are about to take income from their final salary pension schemes, which have a deficit of £260 billion.

PwC’s Pension Funding Index has found the combined deficit of UK defined benefit (DB) pensions was £260 billion between September and October 2020.

It is warning scheme managers they need to focus on how to make pension payments as they fall due.

PwC says that pension schemes need market outperformance to help eliminate deficits, something that is looking unlikely amid economic uncertainty caused by the pandemic, Brexit and any fallout from the US election.

Raj Mody, head of global pensions for PwC, says: “On the one hand, it’s good that pension scheme strategies are generally able to withstand market volatility.

“On the other hand, sponsors and trustees will want to eliminate deficits ultimately and need market outperformance to help with that.

“It’s not clear with upcoming headwinds when markets will deliver what pension funds need.”

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He urged trustees and sponsors not to focus overly on their single deficit measure and to put greater focus on the scheme’s ability to pay its cashflows.

Joe Dabrowski, head of DB at the Pensions and Lifetime Savings Association, says: “Against an already tough environment for generating stable returns, the pandemic has created further uncertainty for pension scheme managers.

“Rock bottom or worse, negative, interest rates in a weaker economy mean many companies are going to find it very tough going for the foreseeable future, and also feed through to the way schemes have to calculate their liabilities, heightening deficits, which in turn require greater employer contributions.”

Dabrowski says most schemes in deficit should eventually reach a sustainable funding position through investment strategies and by drawing on the financial strength of their sponsoring employer.

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He adds:

“Forecasts suggest that some employers in already squeezed sectors are going to really struggle, and increased insolvencies and pervasive deficits which had begun to shrink, may be back for many, for several years.”

 David Sinclair, director of the International Longevity Centre, warns the need to fund deficits may lead to businesses scaling back on pay.
Sinclair says: “With Covid-19 and economic strife putting more pressure on corporate bottom lines, we continue to be concerned that firms may be diverting resources away from supporting the wages of current staff or making productivity enhancing investments in order to plug pension deficits.

“In 2017 our research found that had the money used to plug private DB pension scheme deficits between 2000 and 2015 been redirected towards wages, average salaries could be £1,473 higher.”

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