UK Pension Deficits Due to Contributions Drop
Companies are closing their defined benefit schemes to new employees to address the needs of their existing millions of members.
According to Corporate Consulting Head for Barnett Waddingham Nick Griggs,
“The increase in deficits seen towards the end of 2014 will almost certainly translate into pressure from scheme trustees to reverse, or at very least address, this trend [of lower deficit contributions] in 2015 and beyond.
“If you look at the levels of cash that a lot of companies are holding, there does seem to be potential for increased deficit contributions.”
Big and small enterprises face severe pension deficit risks in the UK today. About 18 have deficts that exceed 10 per cent of their market capitalisation. Seven companies currently hold equities within their pension schemes and have more than 50 per cent of their market capitalisation.
Hargreaves-Lansdown Head of Pensions Research Tom McPhail said:
“This is a recurring problem but it has been acute in recent years. The regulator has to balance the interests of members, employees and shareholders,”
The upcoming interest rate rise could help diminish projected liabilities but if the falling asset values offset the falling liabilities, it could mean a full stop.
Companies nowadays are turning towards defined contribution pension schemes where members could buy annuities or enter income drawdown based on the total assets of their pension pots rather than their final salaries or the years they’ve worked. The amount paid into the scheme had increased by a fifth in 2014.
Current market conditions also indicate the trend to continue widening the contributions gap. Falling bonds yields now counteracting strong investment performance also plays a role in the contributions gap.
Large companies are not discounted from the pension contribution gap. BT now faces a £7 billion deficit scheme.