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11 Feb 2015

Calls For Government To Help Close Pension Deficit Gap

New reports show that private UK companies are struggling with record-breaking pension deficits, The Financial Times has reported.

According to the publication, the Pension Protection Fund (PPF) - which provides security for employees´ retirement savings - recently published deficit details of the 6,057 private sector defined benefit contribution schemes that it looks after.

It was reported that deficits had risen by over £100bn in January, reaching the highest-ever figure of £367.5bn and reflecting a 38% increase from the end of December last year. What´s more, this figure stands at eight times more than the previous year´s £46bn shortcoming.

The FT explains that much of this increase has been produced by alterations in the liability calculations of pension schemes. Extremely low bond yields have meant that employers´ defined benefit pension schemes are thought to need more assets, so that future requirements can be funded. However, the schemes´ deficits then widen if the asset prices do not run in line with the extra funding requirement.

Pensions expert Ros Altmann further explained that: “the policy of artificially inducing ultra-low long gilt yields is causing significant damage to UK pensions.”

“It becomes a vicious circle with low bond yields leading to higher deficits which leads trustees to look at reducing risk which often means buying more bonds which drives yields down further.”

In response to the findings, there have been calls for policy-makers to assist companies in closing the gap. Consultants have stated that the method of “ploughing tens of billions of pounds to shore up pension deficits” has not been enough in an environment of low interest rates; meanwhile, Altmann urges the Bank of England to stop buying longer gilts and “focus only on shorter maturities”.

The PPF has stated that the numbers are merely a “snapshot” and should be taken in context. It also assured savers that, despite the deficit, members of UK defined benefit schemes “do have valuable protection from the PPF in case their employer, or former employer, fails and the scheme cannot afford to pay their promised pension.”

Copyright M2 Bespoke 2015

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