Pension deficits spike £46bn in February with experts warning of more volatility during Brexit negotiations

 
Oliver Gill
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The government is consulting on plans to cut payouts to pensioners (Source: Getty)

The ability of Britain's firm's to manage spiralling pension liabilities is being hampered by the UK's exit from the EU, experts have warned.

Pensions lifeboat, the Pension Protection Fund (PPF) today revealed the aggregate deficit of UK companies had grown at a rate of more than £1.6bn per day during February.

Although deficits have retreated from all-time highs last summer, falling bond yields in February meant the shortfall grew by £45.5bn to £242bn.

Read more: PPF deficits relax down but still on "life support"

Head of UK strategic clients at Blackrock, Andy Tunningley, said market yields had returned to levels last seen in October, adding:

As the UK prepares to trigger formal notice of leaving the EU, government bond yields – and hence pension fund liability values – are likely to be ever more difficult to predict.

Every UK pension scheme is included in the PPF analysis, which showed only 1,414 of the 5,794 funds were in surplus. Total assets held amounted to £1.5 trillion to fund liabilities of £1.8 trillion.

The PPF calculates pension deficits differently to standard accounting measures for UK companies. The PPF's s179 calculation broadly represents the premium that would have to be paid to an insurance company to take on the payment of PPF levels of compensation.

Read more: The obvious solution to fixing pension black holes, according to Lady Judge

Capped

In event of a pension fund falling into the pension lifeboat, the PPF takes on the responsibility of paying benefits to members. But these benefits are are capped and linked to the CPI rate of inflation, currently lower than the RPI more commonly used.

The government recently consulted on changing legislation to allow those schemes which specifically reference RPI in founding documents to change it to CPI. Such a move could lower pension payouts and considerably reduce deficits. Tunningley added:

Though this is very much only an idea at this stage, and is far from being a policy proposal, if enacted it would represent a major departure from current legislation.

Pension funds executives should be wary of placing too much hope on such a magic solution.

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