The Pension Protection Fund has announced that the estimate of aggregate pension deficits shows the smallest figure since June 2011 (when there was a surplus). Aggregate deficits hav fallen from £221 billion at the end of December 2012 (and £231bn as recently as April) to £28bn at the end of 2013.
Commenting on what this means for the deficit numbers that companies and pension fund trustees are more concerned about, and for the risks facing the PPF, John Ball, head of UK Pensions at Towers Watson, says:
“This shows how volatile pension deficits can be, but it’s not quite such good news as it looks. Precisely what you are measuring and how you measure it can make a big difference to estimates of pension deficits.
Accounting deficits
“The dramatic improvement in the PPF numbers is not a story that will be recognised by companies putting the finishing touches to their 2013 accounting disclosures. Higher anticipated inflation makes more difference to the cost of paying full benefits than it does do to PPF compensation, and corporate bond yields did not rise in tandem with gilt yields during 2013.
“While there will be a lot of variation between companies – reflecting differences in investment strategy and the periods over which pensions will be paid out – the deficits in company accounts should typically have gone up during 2013. The increase in future inflation implied by the markets is a big factor here. A large part of that is down to the ONS’s surprise decision last January not to change the way that RPI inflation is calculated; beyond that, companies can consider the extent to which the prices of inflation-linked gilts reflect strong demand for matching assets versus expectations that prices will go up more quickly over the coming decades than previously thought.
Funding deficits
“For the minority of employers who must agree new funding plans based on deficits at the end of 2013, shortfalls will often be a bit smaller than they were 12 months earlier. However, deficits will often be similar or worse than they were when schemes last went through this process at the end of 2010 – despite the cash injections from employers during that time.
The PPF
“Those schemes that would fall into the PPF if the employer went bust tomorrow still have combined deficits of £107 billion against the cost of securing the reduced level of compensation that the PPF provides. The offsetting £79 billion surplus in other schemes means that their members would get something better than PPF compensation without the employer’s support, though this would usually be less than their full benefits.
“The recent improvement to funding levels on a PPF basis might put a little downwards pressure on next year’s levies. However, as the PPF looks at average market conditions over five years, this should not have a big effect. Beyond that, the PPF should announce in the next few months how it will go about setting levies for the following three years. As the PPF grows, so does the extent to which small changes in its asset values can easily outweigh the £700m or so it collects in levies each year. With the PPF’s chances of delivering compensation not particularly sensitive to the levies it collects, where to set the levy in future may become a more political decision.”
|
