Corporate pensions are a problem, holding back investment and creating a millstone around corporate necks, Ben Barlow investigates.
In April 2017 the UK corporate pension deficit rose by almost 6 per cent in one month alone. The total deficit of all UK corporate defined benefit funds increased by 5.8 per cent to £182 billion in April. Though this did represent a fall of 0.5 per cent for the year ended April 30, it includes non-pension benefits as well. On the whole, UK corporate pension deficits have continued to rise or remain stable for a while now due to a number of factors, some of which could see them eventually begin to fall.
Political events and uncertainty have a big impact upon many areas of the financial world, including pension deficits. Recently the announcement of a general election in the UK and the French election saw deficits for pension schemes of 350 of the UK’s largest listed companies improved by £4bn and £7bn respectively in reaction to such news.
However, in the month before that deficits were volatile, with the ongoing Brexit negotiations and other political uncertainty surrounding Dutch, French and the later German elections. Despite a lot of uncertainty across the UK and Europe, most pensions have remained surprisingly stable.
Record Low-Interest Rates
Quantitative easing and record low-interest rates are two other factors keeping pensions deficits high. Even though the aggregate deficit of the UK private sector pensions schemes fell by £1 billion from £182bn at the end of April compared to £183bn in April 2016, low-interest rates are partly preventing them falling further. Instead, they have pretty much stabilised.
One potential ‘positive’ that could help Britain’s pension deficit problem, is that projected life expectancy predictions may have been wrong. Funding defined benefit pension schemes appears to be a major reason the UK’s largest 350 businesses experienced a 9% rise in their pension deficits in April.
Recent research from the UK’s Continuous Mortality Investigation now claims that people may not live for as long as once thought. This has been predicted to cut £310bn off UK pension deficits, should previous life expectancies not be accurate. If a 50-year-old was predicted to live to 90 but now is estimated to live to 85, that can make a massive difference on pension deficits, for example.
Plan Your Pensions Future
Should the UK corporate pension deficits show no sign of falling in the coming years, then there are ways to better secure your own pensions future. Using Tilney services to create a full financial plan covering pensions and investments is one good method. Seeking out alternative ways to save for retirement, such as through investing in stocks and bonds, is another.
It is worth planning for your personal pensions future anyway, though for many UK workers and businesses pension deficits will hopefully begin to fall once the political situation becomes more stable.