The combined defined benefit (DB) deficit has reached another all-time high on the back of further gilt yield falls following setbacks in the central bank's bond buying programme.
Analysis from Hymans Robertson showed the funding deficit surpassed £1trn for the first time on 12 August, just days after the Bank of England (BoE) failed to find enough sellers to complete its first tranche of quantitative easing (QE) on 9 August. This was largely down to buy and hold investors including pension schemes and insurers not wanting to sell because they are encouraged or compelled to buy gilts for liability-matching purposes.
It pushed up the price of gilts, leading to yet more falls in yields, which has increased the value of scheme liabilities. Every time the BoE's Monetary Policy Committee reduces the base rate, it pushes up deficits, which puts even more pressure on trustees to hedge risk.
There is clearly a gilts supply problem, which has been created by existing QE but exacerbated by the BoE's move on 4 August to cut rates and extend its bond buying programme in reaction to Brexit. The policy move immediately increased the aggregate pension deficit by £60bn to £945bn.
Hymans Robertson partner Patrick Bloomfield said while schemes with significant interest rate hedging are "generally doing okay", those with low or no hedging will have been hit very hard in recent weeks. It also depends on whether there is a strong sponsor standing behind the scheme.
"Pension schemes can weather this storm if they can rely on strong business support. Only members in schemes with less robust sponsoring businesses need to be worried. But in the current economic climate it's unlikely we'll see a sudden rush of more schemes falling into the PPF. We need to remember that corporate failures in the UK continue to be low, with underperforming businesses propped up by low interest rates and cheap borrowing."
The record falls in gilt yields in the wake of Brexit have reopened discussions over how to tackle ballooning deficits.
However, Royal London director of policy Steve Webb warned against a knee-jerk response to deficits, and reminded that running a scheme is a long-term job.
"Pension fund liabilities are huge when looked at as a single lump sum, but a large part of those liabilities will not fall due for payment for decades. Policy makers should not respond to these fluctuations with knee-jerk responses such as watering down protection for existing pensioners or forcing firms to contribute unrealistic amounts.
"While firms with cash on hand should be making realistic contributions to their pension funds, forcing companies to divert money from productive investment to tackle increased deficits could unnecessarily undermine the long-term future of the business."
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