Pension Black Hole Shrinks By Another £50 Billion


The pensions black hole shrunk again last month, according to figures from monitor PwC.

The total deficit of almost 6,000 UK direct benefit pension funds measured by the company was £410 billion at the end of October – a fall of £50 billion from the month before.

The data comes from nearly 6,000 workplace direct benefit schemes.

Their assets added up to £1.6 trillion, while their liabilities nudged £2 trillion.

The black hole, or deficit, is the difference in cash and investment returns the schemes expect to have to pay pensions from the assets they have available.

Does ‘gilts plus’ approach distort figures?

Steven Dicker, chief actuary at PWC, said: “The decrease is due to a small increase in long-term real interest rates (interest rates relative to inflation) as measured by government bond (‘gilt’) yields, while assets have grown modestly, which helped to reduce the overall deficit by £50 billion.

“This illustrates the significant volatility with the ‘gilts plus’ approach to measuring pension scheme funding.”

The gilts plus approach is a theory that discount rates applied by pension experts distort the true pensions deficit.

However, the PwC Skyval Pensions Index echoes research by the Pension Protection Fund that revealed deficits had fallen by £62 billion.

The discrepancy between the two figures comes from variations in their data models.

According to PwC, the pensions deficit has reduced throughout 2017.

Is deficit volatility real for pensions?

At the start of the year, the gap was £580 billion against assets of £1.43 trillion and liabilities of £2.01 billion.

“There are questions around whether the volatility in pension deficit figures is real, and matters,” said Raj Mody, partner and PwC’s global head of pensions at the time.

“For some pension funds, it may not matter – the volatility is only there if the situation is monitored frequently and if the measurement method you choose to use tracks volatile market indicators.

“Most people’s heart rates will go up and down during the day, but that doesn’t mean there’s always an underlying problem.”

Another recent survey by actuaries Barnett Waddingham found that although the deficit may be shrinking, the gap equals 70% of company profits – higher than the pension black hole immediately following the financial crash a decade ago.

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