British company pensions have an impossible mountain to climb thanks to yawning debt triggered by the Brexit vote.
Even if they paid an extra £10 billion into the funds every year for the next decade, they would only keep pace with liabilities created in 2016.
The referendum sparked a massive single day loss of £80 billion.
At the end of the year, the company pension blackhole was £560 billion – £90 billion more than in January 2016.
The gap peaked at £760 billion in August.
Call for realism
Company pension assets – the cash and investments in place to pay pension benefits to workers – stood at £1,480 billion.
The liabilities – the benefits owed to retired employees – totalled £2,040 billion.
Although the debt has dropped £20 billion since November 2016, the amount has increased by £90 billion over the year, according to the Skyval Index.
Skyval is a company pension monitor run by accountancy consultants PwC.
“Pension funding deficits are nearly a third of UK GDP. Trying to repair that in too short a time could cause undue strain,” said Raj Mody, PwC’s global head of pensions.
In some situations, longer repair periods may make sense. This can help reduce cash strain by allowing the passage of more time to see if pension assets outperform relative to the prudent assumptions currently used when trustees calculate deficit financing demands.
Old strategies are failing
“It’s not necessarily sensible to calculate deficits prudently and then try to fund that conservative estimate too quickly. Equally, if all parties can get a realistic deficit assessment, it could well be in everyone’s interest to make that good as soon as possible.”
Mody also explained that old pension management strategies are failing.
“Gilt yields have long been the foundation of pension deficit measurement and financing, with a belief that calibrating everything to current market expectations was the best version of the truth.,” said Mody.
“This may have been good enough as an approach in more benign market conditions, but it does not necessarily make sense to fix your strategy for the next couple of decades based on the situation at any single point in time.
“Now is the time for pension fund trustees to ask whether the current management information and analytics they receive is fit-for-purpose for all the decisions they need to make.”
