Britain's pension deficits grew by £100bn in August alone

Oliver Gill
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Simply turning the tap off to new entrants of pension schemes won't deal with the fundamental problem says PwC (Source: Getty)

Britain's companies were urged to think of plugging pension holes as “part of the furniture” of financial planning after new research showed that deficits grew by a staggering £100bn during August.

The PwC Skyval index, which covers 6,000 British defined benefit pension schemes, revealed that aggregate deficits had widened to £710bn by the end of August.

“For some companies the need to repair your deficit is going to feel like part of the furniture going forward. [Unlike previously] it isn’t an exceptional thing that needs to be addressed but a standard operating model for a businesses,” said PwC’s global head of pensions, Raj Mody.

Method Assets Liabilities Deficit Deficit change over last month
Accounting £1,450bn £1,940bn £490bn £90bn increase
Funding £1,450bn £2,160bn £710bn £100bn increase
Buy-out £1,450bn £1,540bn £1,540bn £150bn increase
  • Accounting: the value of liabilities shown in company accounts.

  • Funding: the value of liabilities used by pension fund trustees to determine company cash contributions.

  • Buy-out: the value an insurer would place on the fund's liabilities.

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The index outlines three measures for calculating the aggregate position of Britain’s pension schemes – accounting, funding and buy-out – but PwC is clear which one should be focussed on.

“The funding number is the best proxy for the amount of cash that companies will need to find to repair this problem,” said Mody who warned that such cash “repairs” could have a detrimental affect on UK plc.

“Some businesses will feel that this will constrain them from growth opportunities. Absolutely this could end up as a brake to some extent,” he said.

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Mody also said companies cannot put off the issue anymore because “lower for longer” interest rates mean that the deficit gap is unlikely to narrow.

“What do you do about this situation? Do you sit there and hope for the best. Or do you actively go and tackle the problem,” he said.

(Source: PwC Skyval Index – rebased to January 2016 levels)

One lever commonly advocated is to adjust the rate at which members’ benefits are adjusted for inflation – for example pegging pay-outs to CPI instead the (currently) higher RPI.

“Changing the inflation assumptions is one of a suite of things that can be done,” said Mody.

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Another option put forward by some is to close the small number of schemes in Britain that are open to new entrants. However Mody said that this wouldn’t deal with the fundamental problem.

“Closing them off still doesn’t deal with the legacy problem. I liken it to a bath that is overflowing. You come home and find that your bath is leaking into the floor.

"One of the things that you want to do is turn off the taps but the bathroom is still flooded with water. Its still pouring through the ceiling underneath,” he said.

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