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Difficult times for all UK defined benefit pension schemes

Over the past 12 months, the pensions deficit of firms on the UK’s FTSE 100 index has increased 13%, from a total of £53bn to £60bn. The combined deficit of all UK private sector pension schemes stands at a whopping £182bn.

There are many reasons why we’ve gotten into this situation, primarily interest rates (gilt yields) remaining low, combined with high inflation. The consequence is to place a higher value on defined benefit liabilities.

The good news is this will be partially offset by strong investment markets. The bad news is it’s not enough and the deficit continues to grow. This means employers have to put in even more money to plug the hole or increase the time period in which the deficit will be eliminated. The former may be easier for larger employers, like Tesco, than for smaller employers.

Another option would be for employers to reduce members’ future benefits or even close the scheme to future benefits – 35% of defined benefit schemes are already closed to future benefits – so there’s nothing new here. Some employers may even look to strike a deal with the Pensions Regulator to pass on their liabilities to the Pension Protection Fund i.e. what we believe is happening with Tata Steel and the British Steel Pension Scheme and the Candy Group and the Hoover (1978) Pension Scheme.

Stuart Price