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Final salary scheme deficits continue to shrink

Tom McPhail
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The Pension Protection Fund has issued its monthly update on the state of health of the UK’s final salary pension schemes. This is the UK’s principal official independent measure of scheme funding. Deficit down from £275.9 billion in October to £194.7 billion in November. Funding ratio improved from 84.1 percent to 88.1 percent 4,272 schemes in deficit, 1,522 in surplus. From Tom McPhail, Head of Retirement Policy.

Deficit down from £275.9 billion in October to £194.7 billion in November. Funding ratio improved from 84.1 percent to 88.1 percent 4,272 schemes in deficit, 1,522 in surplus.

Since the inflection point around the Referendum back in June, Bond yields have been rising. As a consequence the funding position of schemes has been progressively improving. This illustrates the risk of making long term policy decisions based on short-term data and mark-to-market accounting. The majority of schemes are likely to return to being fully funded in time and members will get the pensions they have been promised. There are still concerns about a minority of predominantly smaller schemes, some of which may never fully recover. A key focus of attention for 2017 will be how to achieve greater efficiency of operations and security for members; in particular through consolidation.”

“A decade ago, these schemes had 30 percent of their assets invested in UK equities, providing substantial quantities of new risk capital to British businesses; today that relationship had changed, with less than 7 percent of their assets now invested in UK company shares. Final salary pension schemes and their sponsoring employers enjoy very substantial tax breaks from public money, far in excess of those given to the increasing numbers of defined contribution scheme members. It is therefore legitimate for the government to challenge the operation of these schemes and to ensure that they are contributing to the wider economy, as well as delivering on their promises to members.”

NB there have been some technical adjustments to the PPF index calculations which mean that comparisons with previous months are not on a precisely like for like basis. October’s deficit had previously been reported as £328.9 billion.

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