• The aggregate deficit of UK defined benefit (DB) pension schemes has risen by over a third (37%) in the space of a month, from £128.5 billion at the end of April to £176.3 billion last month (https://www.ppf.co.uk/sites/default/files/file-2020-06/PPF%207800%20at%2031%20May%202020%20for%20June%20update.pdf)
• The funding position of DB schemes has worsened significantly from a year ago, when a deficit of £38.1 billion was recorded at the end of May 2019
• Plummeting gilt yields have sent DB liabilities into a tailspin, rising by 3.8% over the month and almost 17% over the year to £1,945.7 billion
• By contrast DB assets have managed to ride out the COVID-19 storm, increasing by 1.4% over the month and 8.6% over the year to £1769.4 billion
• Recent FCA clampdown likely to make it increasingly difficult for those who want to transfer from a DB scheme to access advice
Tom Selby, senior analyst at AJ Bell, comments:
“While DB schemes have, at least for now, been able to ride out the COVID-19 storm on the assets side of their balance sheets, persistently low gilt yields have sent liabilities into a tailspin.
“Over the past 12 months alone aggregate DB liabilities have surged by almost 17%, placing huge strain on companies already struggling to cope during lockdown. These firms will be praying for a rise in gilt yields in the near future, although the trend over the last decade or so has very much been in the opposite direction.
“For members, the big fear will be that their employer will not survive the current turmoil, potentially plunging them into the Pension Protection Fund (PPF) and facing up to a retirement income cut. This fear will inevitably lead to more people considering transferring out of their DB scheme.
“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.”
Source: Pension Protection Fund
