Final Salary Deficits Balloon in 2016

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“You are looking at an increase in the deficit of £17bn.”

This is the message that final salary pension trustees delivered to the CEO’s of the UK’s 100 largest companies in 2016. The addition of this rather large and intimidating number takes the FTSE 100’s final salary short fall to £87bn. The distribution on this debt is by no means even. Standard Life boast a surplus £1.66bn boasting an enviable funding position of 150% (A funding position shows the level of assets against the predicted liability of the pension promises of the scheme). GKN, the global engineering business, reports a £2.03bn deficit meaning it has enough money to fund 56% of the pension promises made.

The reasons for such an increase is twofold. Lower bond yields, typically the largest assets class held by the trustees, means a lower rate of growth at a time when life expectancy is rising significantly. The dual impact is that there is now both a practical and political problem if some schemes are to make good on their promised pension income.

For those companies with significant deficits there are no attractive options. The first and most obvious option is to funnel large proportions of profits into their pension schemes and reduce their dividend payments to investors. The downside of this action will be a potentially large reduction in the competitive edge of UK business as high percentage of profits are funnelled to reduce the pension deficit as opposed to investing in the development of their goods and services.

The second option is to simply reduce the benefits to pensioners by reducing the annual increases made to pensioners, an option which opens a minefield of moral hazard. The government is currently consulting on such action as they have their own deficit to deal with.

One thing is for certain, business leaders and politicians must deal with this issue head on. Kicking the can down road will only lead to a more dramatic resolution when the problem arrives at the doorsteps of the Trustees, Business leaders, politicians and ultimately the pensioners.

(All figures and facts are taken from JLT publication “The FTSE 100 and their Pension Disclosures – August 2017)