• Aggregate deficit now stands at £383.6 billion, an increase of £89 billion since the end of May 2016 & liabilities are up to £1,747bn, a record high.
• Between 2006 and 2015, the equity share of total final salary scheme assets fell from 61.1 percent to 33.0 percent.

Latest monthly data from The Pension Protection Fund, shows how the UK’s pension system has been hit by Brexit (available here). Plunging Gilt yields following the unexpected Referendum result have caused pension scheme liabilities to soar;

Liabilities are up to £1,747bn, a record high; Aggregate deficit now stands at £383.6 billion, an increase of £89 billion since the end of May 2016. The funding ratio worsened from 81.5 per cent at the end of May to 78.0 per cent at the end of June. From Tom McPhail, Head of Retirement Policy.

The UK’s gold-plated pension system is starting to look tarnished. Deficits are soaring, employers are reneging on their promises and still more money is needed. Companies are having to divert profits into schemes to make good on their promises, which means less investment capital to help businesses grow and less money available to invest in the pensions of younger workers. Accrued pension rights have to be respected and investors have to be able to trust the system, however there is also a growing argument for the Government to look at finding a more balanced approach to the retirement funding needs of UK workforce.” There is a substantial discrepancy between the levels of contributions paid by employers for the benefit of final salary scheme members compared to money purchase scheme members.

According to the ONS: for defined benefit schemes, the average total contribution rate was 20.9 percent of pensionable earnings, 5.2 percent for members and 15.8 percent for employers; for defined contribution schemes, the average total contribution rate was 4.7 percent, 1.8 percent for members and 2.9 percent for employers. Possible trade-offs for the future could include allowing employers to water down their inflation proofing commitments on pension benefits, for example replacing RPI indexation with CPI. The government may be keen to strike a deal with employers, because a substantial portion of the tax relief granted on pension contributions every year is in respect of final salary scheme deficit reduction contributions. According to the PPF, a 0.1 percent reduction in Gilt yields raises aggregate scheme liabilities by 2.0 per cent and raises aggregate scheme assets by 0.5 percent.

Scheme investments
According to the PPF, between 2006 and 2015, the equity share of total final salary scheme assets fell from 61.1 percent to 33.0 percent. Between 2008 and 2015, the UK share of total equity holdings fell from 48.0 percent to 25.6 percent, while the overseas-quoted equity share rose from 51.6 percent to 65.4 percent.