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12 Aug 2015

UK pensions gap widening further

The Financial Times recently reported on the issue that UK businesses are paying less in pension contributions than at any other time in the past six years, while the aggregate pension deficits continue to widen.

In fact, the article notes that aggregate pension deficits have reached their highest level since 2009. According to pension consultancy Barnett Waddingham, this increasing gap will result in companies facing pressure from trustees to increase their payments towards the deficits.

Their research has found that FTSE 350 organisations paid just £7 billion into their defined benefit pension deficits last year; that´s 40% less than each year from 2009-2012, and 20% less than 2013.

Meanwhile, their aggregate deficits grew to £64.7 billion from £53.5 billion during this time due to a drop in corporate bond yields, which drove ‘discount rates´ down. Although the majority of companies have now blocked their defined benefit schemes from new members of staff, there are still a number who face liabilities from around 7 million members.

Barnett Waddingham advises that, looking at current market conditions, it´s likely that deficits will continue to widen as plummeting bond yields counteract positive investment performance.

The firm´s head of corporate consulting, Nick Griggs, stated that: “The increase in deficits seen towards the end of 2014 will almost certainly translate into pressure from scheme trustees to reverse, or at very least address, this trend in 2015 and beyond.”

Also commenting on the issue of low deficit contributions was Tom McPhail, head of pensions research at Hargreaves Lansdown, who said that this recurring problem has been “acute in recent years” and that “the regulator has to balance the interests of members, employees and shareholders.”

More companies are moving towards a defined contribution pension scheme, and the average amount paid into these rose by around 20% in 2014; but 170 FTSE 350 companies still have a defined benefit scheme, which will pay out some £970 billion between now and 2045 - an amount that Barnett Waddingham called “remarkable.”

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