Brexit shines a light on pensions timebomb

Tracey Boles
UK Faces Pension Crisis
The rise in liabilities could have increased the deficits across the near 6,000 schemes in the Pension Protection Fund (Source: Getty)

As the economic landscape shifts in the wake of the referendum, one of the most dramatic impacts has been on defined benefit, or final salary, pensions.

In the days following the vote, liabilities in defined benefit schemes ballooned, causing deficits to widen.

According to early estimates, the rise in liabilities could have increased the deficits across the near 6,000 schemes in the Pension Protection Fund’s 7800 Index by £100bn or more.

The primary reason is lower gilt yields which have fallen as investors seek safe havens. And as gilt yields go down, pension liabilities go up. The question is whether the sky high liabilities are a temporary blip, or a new reality. Last Thursday’s speech by Bank of England governor Mark Carney, which raised the prospect of an interest rate cut or more quantitative easing, increased the likelihood of it being the latter.

No wonder there is talk of a pensions timebomb.

Read more: Has Brexit ruined your pension?

Defined benefit pensions, many of which are closed to new members, were already in a collective deficit prior to the referendum. At some point, the shortfalls must be plugged. There are two main ways of doing this: higher investment returns, or top-up contributions from employers and employees. As things stand, trustees may have little option but to demand significant increases in cash funding from companies.

Historically, many firms have had a tendency to put their heads in the sand with regard to pensions shortfalls. Such an attitude can no longer continue.

Lady Barbara Judge, the outgoing head of the Pension Protection Fund (PPF), warned yesterday: “Everybody had been hoping that the economy would improve and that interest rates would go up, and the problem would solve itself, but now Brexit has changed the game.” Pensions minister Ros Altmann has called for companies to put pension top ups ahead of dividend payouts if possible. Official figures from the PPF on the state of final salary schemes at the end of June are due out this week. That should serve as a wake up call to companies and trustees who are facing some tough choices.