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29 Jun 2016

Brexit sees UK´s pension funding hole hit record high

Britain´s decision to leave the European Union has resulted in the UK´s pension funding hole hitting a record high of £900bn, raising concerns about the future of some retirement schemes, the Financial Times reports.

In the hours following the result, the deficit of defined benefit pensions — which pay out benefits linked to an employee´s final salary – grew some £80bn, according to Hymans Robertson.

Friday saw Sterling plunge to a 30-year low, while markets across the world plummeted and bond yields dropped.

Jon Hatchett, head of corporate consulting at Hymans Robertson, said pension funds have not been successful in protecting themselves fully from the uncertain outcome of the EU referendum.

He added: “Following the vote to leave, it is likely that falls in expectations for UK gross domestic product growth will weigh on equity markets and on interest rates, putting more pressure on funding deficits.”

Europe´s pension funds have seen deficits rise off the back of the financial crisis and low interest rates in recent times – Brexit looks set to create more pain for funds.

In April this year, Philippe Desfossés, chief executive of ERAFP, France´s €24bn pension scheme for civil servants, warned that the European Central Bank´s decision to keep interest rates low has put many big retirement schemes in jeopardy.

There are fears that increased volatility in gilt yields and Sterling could have further impact on pension schemes.

The issue of large deficits becomes a big concern if the scheme´s sponsor goes bust, as was the case with UK retailer BHS.

When it went into administration in April, BHS left behind a pension deficit of £571m, which is now being absorbed into an official rescue fund.

Copyright M2 Bespoke 2016

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