The deficit of the 7,400 defined benefit schemes, including final salary pensions, widened to £200.1 billion during the month, after dipping below the £200 billion mark for one month in May.
The current shortfall represents a dramatic turnaround from the collective £13 billion surplus the schemes had in June last year, according to pensions safety net the Pension Protection Fund.
Pension schemes have faced a double whammy of falling asset values and rising liabilities during the past year. The cost of their liabilities to members has soared by 21% during the past 12 months due to lower gilt yields.
At the same time, falling equity markets have slashed the value of the schemes’ assets by 5.5%. A total of 6,461 pension schemes now face a funding shortfall, representing 88% of all defined benefit schemes.
The ongoing funding problems faced by many pension schemes is expected to lead to an increasing trend among companies to close their final salary pensions to existing staff, meaning they can no longer build up further benefits in them.
The majority of companies have already closed these schemes to new members, and
a recent report carried out by PricewaterhouseCoopers showed that 16% of ompanies have also frozen their schemes to existing ones.
A further 42% of employers said they planned to close their final salary schemes to future accruals in the near future, while 32% said they were considering doing so.
The aggregate funding position – total assets minus total liabilities – of defined benefit schemes has worsened during the last month, the Pension Protection Fund says.
The lifeboat fund said its PPF7800 index showed the aggregate deficit of UK schemes has grown to £200.1bn at the end of June from £179.3bn at the end of May. The PPF7800 index showed a surplus of £13bn at the end of June last year.
The PPF estimated the total deficit of schemes in deficit in June 2009 has worsened to £215.8bn from £196.8bn at the end of May. In June 2008, the aggregate deficit of all schemes in deficit stood at £60.3bn.
The total surpluses of schemes in surplus also worsened. It fell to £15.7bn from £17.5bn at the end of May 2009. In June 2008, the total surplus of all schemes in surplus stood at £73.3bn.
The rush out of defined-benefit pension schemes in recent months has become all too common. Britain’s richest company BP has closed its scheme, regarded as one of the most generous, to new members.
And Barclays, seeking to conserve cash in a hostile climate for banking, has taken all but a handful of top executives out of its final salary scheme. Elsewhere at BT and British Airways the pension-fund deficit has become the elephant in the room.
BT may yet face delicate negotiations with the Pensions Regulator on its future obligations later this year as it completes its triennial actuarial valuation.
Just how bad life has become for defined-benefit schemes, which have more members than any others in the UK, isevident from the Pension Regulator’s annual
report. It notes a sharp deterioration in the health of defined-benefit schemes.
At the end of March 2007, after a strong run for financial markets and efforts by companies to fill gaps, the surplus in defined benefit schemes reached £74.2billion. As the credit crunch drove down markets, the surplus was turned into a modest £5.1billion deficit by the end of March 2008, which ballooned to a £242billion shortfall by this March.
It has now narrowed to £200billion. Clearly, the end of the bull market and the sharp decline in equity prices played its part in this. Other factors have been increased mortality and the higher costs of running pension funds, with healthy retirement schemes now required to bail out of those of failed companies.
Except in a few brave companies, final-salary pensions look as dead as a dodo for new employees. What’s worse, in the case of some quoted corporations, they could threaten dividend payouts and returns to investors as companies struggle to come to terms with their liabilities.
Given the deterioration in defined-benefit schemes, it is understandable that employers’ group the CBI is among those campaigning for the government sector to face up to its pension obligations. Most recent estimates suggest a shortfall of £750billion in publicsector schemes. However, that may well be an underestimate.
But with private sector employers struggling under the weight of deficits, this is a problem that is not going to go away. It may have the surprising side-effect of rendering many quoted companies bid proof. But it is a defence that they would rather not have.
There is a long line of elephants queuing to get in the door:
– some estimates suggest that the cost of aging populations is such that the costs of the financial crisis to date are only 5% of ongoing losses which must be sustained by 2050 as a result of aging.
– ageing populations will turn into falling populations between now and 2030 for most all developed and many developing nations. The associated GDP losses for this reason alone will be vast.
-ageing populations will increase propensity to save among the younger consuming classes which will kill demand, while the hump of elderly boomers finally retiring and spending what they have left will still ensure that the overall result is dis-saving. Cost of capital will at or belo zero with no-one wanting to borrow it.
"everyone is looking to cut corners and profit on the backs of an ever restless working class wondering how they will safely retire without losing their dignity."
Restlessness combined with loss of dignity can lead to very vexing and deplorable, err, shall we say "social movements"?
These movements can overthrow governments at the polls…and that is the most benign outcome.
Perhaps the powers that be should think about the potential for less benign outcomes.b
Just skimming a bit, and speaking very broadly, pensions imply the idea of significant economic growth in order to be sustained.
Thus that growth or lack thereof is the only deciding factor for a pension plan.