The pensions black hole at Britain’s biggest companies shrunk by £20 billion last month mainly thanks to rising inflation.
The pensions are run for millions of workers at 5,800 businesses.
Total pension liabilities are estimated as a combined £2,030 billion, but the schemes only have assets of £1,530 billion – a shortfall of £500 billion.
Few of the companies expect to pull their pension schemes out of the red as the cash must come from slashing dividends to investors or from other income.
The Skyval Index, run by international accountants PwC, monitors the pensions and publishes a monthly progress check.
Inflation eases deficit
Steven Dicker, PwC’s chief actuary, said: “Despite only small market movements over the last month, the overall deficit has fallen by £20 billion to £500 billion.
This was mainly due to a decrease in assumed inflation, reflecting movement in the published yields often used to set this assumption. This highlights how sensitive measurement of pension liabilities is to even modest changes. It can also be counterintuitive, as inflation is expected to rise further.
“Now the Brexit process has officially started; pension schemes face two years of uncertainty and potentially volatile deficits.
“This only adds to the challenge of long-term planning, especially when using a market ‘snapshot’ approach for actuarial valuations. Many schemes will be considering alternatives to the traditional “gilts plus” approach to try to get a clearer picture of their liabilities.”
Many of the companies running final salary/defined benefit pensions are encouraging workers to cash in their pension rights in return for a pension lump sum.
Pension offers like lotto wins
Some workers have offers of 35 times their likely annual pension payment in return for leaving the scheme.
A 55-year-old worker expecting a £24,000 a year pension at 65 linked to cost of living increases can expect a golden goodbye of £849,000.
Although many advisers stress final salary pensions come with many benefits, such as index linking, widow pensions and guaranteed annuity rates that are not available from private pensions, the cash lure proves too much for many.
The money is available immediately to an over 55 who may have to wait a decade for a workplace pension pay-out, unspent funds are free of inheritance tax if they stay in a pension and the cash lump sum is much larger.
