Pension Deficits Fall as BOE Hints at Future Interest-Rate Hikes

  • Higher bond yields cause pension gap to shrink by 10%
  • Government abandoned plans to downgrade triple lock from 2020

U.K. pension deficits fell to the lowest level since the end of 2015, dropping 10 percent in June as yields on government bonds rebounded.

The gap between the assets and obligations of U.K. defined-benefit pension plans was 460 billion pounds ($597 billion) as of June 30, according to PricewaterhouseCoopers LLP’s Skyval Index, published Monday. The index tracks around 6,000 defined benefit schemes in the U.K.

The outlook for pensions has improved since last summer, when ballooning deficits following Britain’s decision to leave the European Union caused several companies to close their schemes to new entrants. Bank of England Governor Mark Carney said last week that policy makers might need to begin raising rates soon, which will likely feed through to retirement obligations, as they are based on the yield of 10-year government bonds.

The quickly shrinking gap in June “continues to illustrate the sensitivity of this type of deficit calculation to even modest market movements, said Steven Dicker, chief actuary at PricewaterhouseCoopers, which aggregates the data. “With continuing political and economic uncertainty continues, deficits calculated on this basis are likely to remain volatile.”

The Conservative government had sought to address the burden of pension commitments in its election manifesto, with a plan to decouple annual rises in pensions from inflation from 2020. But when the election returned a minority government for May propped up by Northern Ireland’s Democratic Unionists, the commitment was abandoned.

    Before it's here, it's on the Bloomberg Terminal.