U.K. Pension Deficits Fall From Record as Challenge Remains

  • Defined-benefit plans have 690 billion-pound funding gap: PwC
  • Low bond yields cut returns as firms consider closing funds

U.K. company pension deficits fell by 20 billion pounds ($26 billion) in September but remained close to the previous month’s record high of 710 billion pounds, a study showed.

The funding gap for defined-benefit pensions, which pay retirees fixed amounts based on factors including length of service, stood at 690 billion pounds as of September 29, according to PricewaterhouseCoopers LLP.

“September’s market movements go to show that, layered on top of the long-term challenges which pension funds face, some will also have to deal with the impact of short-term volatility,” PwC global head of pensions Raj Mody said in a statement Friday. 

Pension deficits have ballooned since the U.K. voted to leave the European Union, as government bond yields have hit record lows after an interest-rate cut by the Bank of England. With Bank of England Deputy Governor Minouche Shafik saying at a Bloomberg event Wednesday that “long-term rates will be low for quite a while,” company trustees should look at “the circumstances of the pension fund, the profile of the liabilities, appetite for risk and the company’s status,” Mody said.

A slight reduction in the size of deficits shouldn’t be taken as a sign that things are improving, Mody said in a telephone interview.

‘Sizable Problem’

“You’re in the zone where there is a problem,” he said. “Whether it’s 600 billion or 700 billion, it’s still a very sizable problem. There’s a huge amount of cash that needs to go into the pension scheme, arguably prematurely, that could otherwise be invested in the business, for the longer-term health of the business."

Separate research from consulting firm Mercer published Thursday found that the 2017 profits of companies in the FTSE 350 could shrink by 2 billion pounds due to pension costs. More companies may respond by closing defined-benefit plans and shifting to defined-contribution systems, in which companies and employees make monthly deposits into retirement funds whose eventual payouts can vary.

Companies including Royal Mail Plc and Marks & Spencer Group Plc have said they’re reviewing their defined-benefit plans despite employee opposition to closing them.

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