UK pension deficits spiral £100bn in a single month

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Pension deficits at UK firms spiralled by £100bn over the last month as new record low interest rates dragged down expected returns on investments.

Pension funds now own assets worth £710bn less than the amount they will have to pay out to workers on retirement, according to analysis by PwC’s Skyval index.

Worse may be on the horizon if the economy continues to flatline. “With the prospect of further action from the Bank of England to reassure the economy in these uncertain times, the challenging environment for pension funds is likely to endure for several years,” said Raj Mody, PwC’s global head of pensions.

The uncertainty around the economic outlook following Brexit markets wiped billions from the value of UK companies and prompted the Bank of England to lower interest rates to 0.25 per cent in a bid to stimulate the economy.

Interest rates could remain low for the foreseeable future, depressing the returns that investors can expect. But PwC’s analysis found half of pension fund trustees had not protected themselves against such a scenario, meaning the gap could widen further.

“The conditions we’re experiencing now are driven by the market’s expectation of unprecedented lows of long-term interest rates. It is indirectly linked to the base rate – the industry is acclimatising to the idea of lower yields for longer,” Mody said.

To plug the yawning gap, companies are now faced with a stark choice: pump more cash from their businesses into their pension funds, or obtain better returns from their investments.

Mody, who provides pensions advice to companies, suggested the latter: “I suspect pension schemes’ asset strategies haven’t been modernised or updated to allow for these new market conditions – they are probably based on beliefs about economic conditions from years ago.”

“Even six to 12 months ago the prognosis for our economic future was different to what it is now. They need to ask, is this the right structure, is it delivering the right risk-reward profile for the world we’re now in.”

A host of UK firms have been forced to take action to shore up their pension schemes. In January, RBS said it would pump £4.2bn into its fund.

Sir Philip Green has been under intense pressure to fill the £571m pension hole at retailer BHS, which closed its stores in August.

Click here to download a free guide on "easy to avoid pension mistakes", from Independent Partner, Hargreaves Lansdown.