Firms need extra £10bn cash per year to plug 2016’s DB deficit increase

Companies will need to set aside an extra £10bn every year for the next decade in order to fix the growth in defined benefit (DB) deficits over 2016, according to PwC.

Companies will need to set aside an extra £10bn every year for the next decade in order to fix the growth in defined benefit (DB) deficits over 2016, according to PwC.

Over the twelve months, the aggregate deficit shot up by £90bn on the funding-based measure, marking a 19% increase, according to the firm’s Skyval index.

As of 31 December, the combined deficit stood at £560bn, with assets totalling £1.48trn while liabilities totalled £2.04trn.

On the IAS 19 accounting measure, the figures hit £360bn, £1.48trn and £1.84trn respectively.

The deficits are largely driven by a fall in gilt yields after the UK’s vote to leave the European Union in June 2016, and the Bank of England’s interest rate cut and £70bn quantitative easing programme.

The calculations are based on publicly available data of all UK private sector DB schemes, and use information from the Pension Protection Fund (PPF).

In order to fill the increased gap over a 10-year period, companies will need to pour an estimated extra £10bn into their scheme each year.

PwC global head of pensions Raj Mody said schemes may benefit from not agreeing repair payments tied too closely to prudent deficit assessments.

“Last year, we identified that pension funding deficits are nearly a third of UK gross domestic product (GDP),” her said. “Trying to repair that in too short a time could cause undue strain. In some situations, longer repair periods may make sense.

“This can help reduce cash strain by allowing the passage of more time to see if pension assets outperform relative to the prudent assumptions currently used when trustees calculate financing demands.

“It’s not necessarily sensible to calculate deficits prudently and then try and fund that conservative estimate too quickly. Equally, if all parties can get a realistic deficit assessment, it could well be in everyone’s interest to make that good as soon as possible.”

Mody also called on DB schemes to consider alternate deficit calculations which are not based on gilt yields.

“Gilt yields have long been the foundation of pension deficit measurement and financing, with a belief that calibrating everything to current market expectations was the best version of the truth,” he continued.

“This may have been ‘good enough’ as an approach in more benign market conditions, but it does not necessarily make sense to fix your strategy for the next couple of decades based on the situation at any single point in time.

“Now is the time for pension fund trustees to ask whether the current management information and analytics they receive is fit-for-purpose for all the decisions they need to make.”

The index also showed deficits hit a peak of £710bn in late August 2016, following the vote on the EU and the BoE’s rate cut. Long-term gilt yields fell by 1% in the two-month period, from 2.2% to 1.2%, although they have since risen.

Meanwhile, deficits fell by £10bn in the immediate aftermath of the US presidential election in November, when Donald Trump was elected to the top office in a victory that shocked the world.

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