• The aggregate deficit of UK defined benefit (DB) schemes surged again in July, from £174.8 billion to £199.5 billion (https://www.ppf.co.uk/sites/default/files/file-2020-08/PPF%207800%20at%2031%20July%202020%20for%20August%20update.pdf)
• Persistently low gilt yields are the prime culprit, pushing up scheme liabilities by 1.2% over the month and 12.6% over the year to £1,974.6 billion
• By contrast, DB asset values have remained flat over the month and increased 5% over the year to £1,775 billion
Tom Selby, senior analyst at AJ Bell, comments: “With COVID-19 continuing to drive both Government and Bank of England policy, defined benefit schemes have been caught in the crossfire.
“Although DB asset values have recovered following the initial slump in global markets in March and April, liabilities have continued to rise in the face of persistently low gilt yields. This in turn has pushed up the deficits of DB schemes – funding gaps which businesses will need to plug in the coming months and years.
“For firms already struggling to cope with the economic fallout of lockdown, a DB pension headache is the last thing they need.
“While some may hope gilt yields increase and in the process ease the funding pressure they are facing, the trend in recent years has been in the opposite direction.
“And although The Pensions Regulator will want to be pragmatic when assessing firms’ plans to plug DB deficits, it will also need to ensure members are not treated as second class citizens.
“As the Government’s furlough scheme is slowly removed and job losses start to bite, getting this pensions balancing act right will not be easy.”
The PPF and advice access
“Members of DB schemes will understandably be nervous about the future – particularly if their scheme sponsor operates in a sector facing severe pressure as a result of COVID-19.
“Although the Pension Protection Fund (PPF) continues to provide a strong insurance backstop where a company does go to the wall, many who fall into the lifeboat fund will still have to face up to severe pension cuts.
“Inevitably given the economic circumstances, some people in DB schemes will look at whether a transfer out could be the right course of action. Anyone contemplating going down this path needs to think very carefully, in conjunction with their adviser, about the implications of such a decision – including the loss of the implicit guarantee provided by the PPF.
“However, in light of the FCA’s recent clampdown on contingent charging, the reality is many savers with DB funds worth £30,000 or more will find it increasingly difficult to access advice at all, either due to the upfront costs involved or the lack of availability in the market.
“Those in this position will be left hoping the economy bounces back and their scheme sponsor remains in business long enough to pay their pensions.”
