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UK pension funding deficit nearly one third of GDP

The total deficit of defined benefit (DB) pension funds is £580bn, almost a third of UK GDP, according to PricewaterhouseCoopers’ (PwC) Skyval index.

01 DEC 2016 | CHRIS SEEKINGS
Pension funds heading for 'potential trouble' ©Shutterstock
Pension funds heading for 'potential trouble' ©Shutterstock


This is despite a £50bn funding improvement in November, with the current deficit more than £100bn higher than it was at the start of the year.

However some pension funds are said to be ignoring the volatility of deficits, which could result in missed practicalities of obligations, putting the security of savers at risk.

PwC global head of pensions, Raj Mody, said: “For some pension funds, it may not matter, 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.

“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.”

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

Source: PwC
Source: PwC

This provides a snapshot of the health of the UK’s 6,000 DB pension funds, and is measured based on the value of liabilities used by pension fund trustees to determine cash contributions.

“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,” Mody added.

“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 advise that pension fund decision-makers should consider a more gradual approach when trying to cut the deficit.

They argue that trying to bring it down too fast could put undue strain on economic growth, and that sensible deficit repair periods should be adopted.

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.