Over the last 12 months, the overall Defined Benefit (DB) Pension scheme deficit has risen by £93.9 billion. In the last month alone, this included an increase in deficits by £2.1 billion. Importantly, yields on UK government gilts and annuity rates have remained consistently low which means that pensions are having to hold larger account balances to pay member incomes.
For example, an income of £3,000 requires a capital holding of £100,000 if the annuity rate is 3% to pay out the required income. If the annuity rate drops to 1.5%, then the capital holding required to pay an income of £3,000 becomes £200,000. This shows the deficit from small reductions in gilt rates having a large impact of the holding required of pension scheme assets and thus the increase in deficits across the board.
The Pension Protection Fund (PPF) is a government initiative (it is not government backed) to protect the members of DB pension schemes in the case of the pension being underfunded to meet their liabilities. PPF funding fell 0.2% from 91.4% to 91.2% recently. PPF scheme assets have also declined by 1% through the same period, with a total fall of 2.9% over the course of 2020. Generally, there has been a rise of DB pension schemes in deficit, now with a total of 3,617 (66.7%) underfunded schemes.
Unemployment and company disruptions have remarkably been less impacted than expected due to government initiatives such as furlough schemes and company capital aid, however, government initiatives are not permanent and funding reductions are a constant threat to members and trustees due to lower resources.
As markets remain volatile and uncertain due to Covid-19 and political turmoil, the importance of remaining active in one’s financial plans is highlighted. It is crucial for individuals to consider their pension scheme and get professional, reliable, financial advice to secure their financial future.
If you would like to speak to a financial adviser about your pension and take control of your financial journey, contact us today.
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