Pension Deficits Rise As Alarm Sounded Over 2nd Lockdown

By Lucia Osborne-Crowley
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Law360, London (November 11, 2020, 1:56 PM GMT) -- An investment consultancy has sounded the alarm over the country's rising pensions deficit, saying the total shortfall for defined benefits has ballooned to £168 billion ($222 billion) in October as Britain headed into its second lockdown.

The number of defined benefit pension schemes that are facing a deficit has risen by 10% over the past 12 months, consultancy AJ Bell said on Tuesday. The firm said this is linked to low yield on government gilts, a type of government bond. The deficit is the gap between how much a pension plan has to pay out and the money available.

The shortfall for defined benefits in October 2019 was considerably smaller, at £74.3 billion, figures from AJ Bell show.

"Defined benefit pension deficits remained eye-wateringly high at £168.2 billion in October, while the number of schemes facing up to a deficit has risen 10% over the past 12 months to 3,216," Tom Selby, senior analyst at AJ Bell, said. "The main driver behind surging defined benefit deficits over the past year — and indeed the previous decade or so — has been persistently low U.K. government gilt yields."

Selby added that lower yields on government gilts lead to a growing deficit because a pension scheme's liabilities are calculated based on the returns available from those gilts.

The Bank of England recently announced an extra £150 billion more in quantitative easing — a strategy in which the government buys public debt securities from commercial banks to inject more cash into the financial system — to lift the U.K. economy, which took a big hit as a result of the COVID-19 lockdowns.

Selby said this "could be like throwing kindling on an already roaring pensions fire." He added that Britain's decision to buy more gilts could heap "further pain on employers already shouldering the burden of enormous historic [defined benefit] pension promises."

However he continued that it "may well actually preserve the pensions entitlements of millions of workers" if the Bank of England's intervention helps companies stay afloat in the longer term. News of progress in developing a COVID-19 vaccine could also boost gilt yields and the wider economy, Selby said.

Deficits in the workplace pension schemes of Britain's largest companies grew by £2 billion in October. Trustees are warning of "storm clouds" on the horizon from a second pandemic lockdown.

The combined shortfall in the defined benefit retirement schemes for the 350 largest companies listed on the London Stock exchange rose from £73 billion at the end of September to £75 billion by Oct. 30, professional consultancy Mercer said in October. The deficit had begun to shrink from the record highs seen earlier this year, when the pandemic triggered significant falls in asset values. Defined benefit pension deficits for FTSE 350 companies were £41 billion at the end of October 2019.

--Additional reporting by Martin Croucher. Editing by Ed Harris.

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