General Election 2015: A Labour-led government would be best for company pension deficits

 
Jessica Morris
Follow Jessica
Labour would be best for companies' final salary schemes (Source: Getty)

A labour-led government after the General Election would be best for employers struggling with pension scheme deficits, as the ensuing uncertainty would inject some upward momentum into bond yields and narrow funding gaps.

Final salary pension schemes give retirees a guaranteed level of income regardless of movements in the stock market, as well as any changes to the value of its investments.

The Bank of England's bond-buying program has created a headache for the managers of companies' final salary pension schemes. This is because it's dampened government bond yields, thus increasing funding shortfalls, because liabilities are calculated in reference to these.

In short, rising government bond yields are good news for final salary pension schemes as this plugs deficits. On the other hand it's bad news when they go down, because this will cause funding shortfalls to widen.

According to a report released yesterday by the Pension Insurance Corporation a Labour-led government would be best for these kinds of pension funds.

"A Labour-led government could see a rise in yields if markets grow suspicious that it will increase borrowing to fund public spending, especially if supported by the anti-austerity SNP," the report said.

"Labour has attempted to reassure markets by saying that none of their manifesto commitments will be funded by unannounced borrowing and that it will reduce the deficit each year. However the reality is that its deficit reduction plan is less sharp than the current government's."

Nonetheless, if the coalition stays in power, then bond yields are likely to remain low, as the "known quantity" increases investor confidence.

Related articles