Britain’s top company pensions are in the same state as they were a decade ago despite the billions of pounds ploughed into the funds.
Financial and management consultants PwC started tracking the state of FTSE350 defined benefit pensions in 2006.
The figures look at how the financial strength of the businesses relates to workplace pension obligations.
Over the 10 years, the companies have paid billions of pounds into pension funds, seen more protections to safeguard the funds put in place by regulators while corporate performance has gradually increased.
Despite these measures, PwC argues that no overall improvement has been seen in the ability of the companies to support their pensions.
Gilt yields shock for funds
Part of the problem is continuing low gilt yields stopping an improvement in the value of the funds.
Workplace pensions invest heavily in gilts and rely heavily on them to perform well to generate the cash funds need to pay pensions and top up reserves.
However, gilts have struggled in recent years due to the pressure of quantitative easing, and a further fall in value after the Brexit result shows that many firms misunderstand how gilt yields can shock their funds.
Companies that have seen better pension results are those that have hedged their liabilities, pointed out the report from PwC.
Jonathon Land, pensions credit advisory leader at PwC, said: “Following Brexit, trustees and companies need to understand how their particular employer will be impacted in future. There will be winners and losers – you need to know which group you are in and what to do about it.
Time running out
“If you have a strong covenant and can support further shocks, there is the option to take a longer term view and you may well benefit if rates revert to long-term averages. However, if your covenant is weaker, de-risking and/or using a contingent asset would appear to be a better approach. Our analysis of the FTSE 350 over the last 10 years would certainly support this view.
“Time is running out for trustees and sponsors that have been waiting for gilt yields to rise. The key question for those who have kept their interest rate exposure is whether the sponsor covenant can withstand the downside if gilts fall further.”
View a video of PwC’s Chief Economist, Dr Andrew Sentance, discussing how volatility and divergence are the ‘new normal’
