Deficits in DB pensions schemes have increased by a further £10bn since the start of the Covid-19 lockdown.
Official figures from the Pension Protection Fund show the total deficit of the UK’s DB schemes increased to £135.9bn at the end of March.
This is a jump from £124.6bn at the end of the previous month. At the start of 2020 the aggregate deficit figure stood at just £10.9bn
Schemes have been hard hit as stock markets across the globe have seen dramatic falls, in the wake of the coronavirus pandemic and subsequent lockdown in many countries.
Financial advsiers point out that these DB schemes are in the eye of the storm, with many also hit by falling gilt yields, pushing up potential transfer values.
Advisory firm deVere Group chief executive Nigel Green says “Falling gilt yields will drive up transfer prices. Of course, this is positive for members wanting to take money out of the defined benefit scheme, but these larger pay-outs put extreme pressure on the pension schemes themselves, many of which face liquidity issues already.”
However recent figures published by LCP indicate that requests for transfer values have fallen to a record low in recent months. However the pension consultants noted some schemes have seen a marginal increase in requests. It said these are likely to be cases where there are concerns about the solvency of the sponsoring company, and whether the scheme would be rolled into the PPF.
AJ Bell senior analyst Tom Selby says: “These figures demonstrate yet another grim reality of the current crisis, with the total deficit of schemes in the UK rising by over £10bn in March.
“While such figures may understandably give members of DB schemes the jitters, it’s worth remembering the most important thing is not the value of any deficit today, but the ability of an employer to survive long enough to pay your pension both now and in the future.
“Furthermore, DB schemes benefit from the safety net of the PPF, so even if the scheme sponsor faces liquidation you should still get a significant chunk of the pension you were promised.
“From a company perspective, bigger DB deficits are a problem because they could threaten to divert cash that would otherwise be used to fund growth plans and reward shareholders.”
Selby says that with DB schemes under severe pressure, the Pensions Regulator stepped in last week to give struggling companies breathing room when paying off deficits.
“Trustees of DB schemes were told they should be ‘open’ to requests to reduce or suspend Deficit Recovery Contributions during the current turmoil, while recovery plan submissions and the provision of Cash Equivalent Transfer Values (CETVs) can be delayed by up to three months.
“This flexibility is undoubtedly better than nothing. However, ultimately what DB schemes will really be waiting for is market conditions to turn back in their favour.”
Green adds: “UK final salary schemes are in the eye of the perfect storm. With most experts now forecasting a major economic downturn, it will become increasingly difficult to fund pension schemes. It can be expected that some firms will find the true cost of operating them increasingly prohibitive.”
He adds: “The magnitude of these deficits brings into question the very survival of many company pension schemes and, in order to survive, they might need to consider drastic changes to the terms of employees’ pension schemes.
“Therefore, sooner rather than later, they should explore the available options to safeguard their retirement income.”