“The combined deficit of UK defined benefit (DB) pension schemes has hit £950bn for the first time ever. This is off the back of further drops in yields as the Bank of England attempts to roll out its package of Quantitative Easing. The BoE failed to buy the gilts it hoped to yesterday as investors seem to be unwilling to part with their longer-dated bonds. In light of that we could see the situation deteriorate further over the coming days.
“It’s doesn’t come as a surprise that pension schemes are being hit hard, but the pain won’t be felt equally by all. The difference between those that had hedged and those that hadn’t will be marked. Many schemes with robust funding plans will be able to weather this. But some will be feeling the pain acutely, and there could be more to come.
“That’s because above target inflation will flow through to higher pension indexation, putting yet more pressure on scheme finances and cashflow. Those who’ve planned ahead will weather the storm, but those who haven’t could become forced sellers of assets at just the wrong point in the economic cycle.
“While pensions are long-term, the past months’ events highlight the need for schemes to become more resilient to risk. Specifically, they need to ensure they don’t take more risk than they need to. They also need to place much closer attention to assessing the financial ability of their sponsoring company to support the scheme now and in the future.
“The Work and Pensions Select Committee launched an inquiry on Monday into the sustainability of DB pension schemes. There are a range of options on the table that could come under consideration. In this, we need to remember that for schemes in distress, a healthy balance needs to be sought to keep sponsoring businesses viable on an ongoing basis to avoid members falling into the PPF and taking a significant haircut to their benefits. At the same time ailing businesses should not be kept afloat because there is a DB pension scheme attached.”
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