Value of ‘gold-plated’ pension schemes fell by more than £400bn last year: assets held by corporate funds fell by as much as 23%
- Details of this destruction in figures from The Pension Protection Fund
- Route equivalent to the economy of Israel or Argentina
- It set alarm bells ringing for experts
The value of ‘gold plated’ pension schemes fell by more than £400 billion last year.
Assets held by company pension funds that guarantee the retirement income of 10 million workers based on their last salary fell by as much as 23 percent to £1.4 trillion last year.
That is more than the market capitalization of Shell, Unilever and HSBC combined.
The lock open: Assets of company pension funds that guarantee the retirement income of 10 million workers based on their last salary fell by a whopping 23 per cent to £1.4 trillion
Details of this massive asset value destruction — a defeat equivalent to the economy of Israel or Argentina — are contained in figures from The Pension Protection Fund, the industry’s lifeboat.
It set alarm bells ringing for experts. “There is simply less in the pot to pay for pensions,” says Iain Clacher, professor of pensions at Leeds University Business School.
The news wasn’t all bad. Liabilities – the net present value of future pension commitments – fell even more than the assets of 5,100 plans under review.
That meant the gap between £1bn in promised payments and the assets that financed them showed a surplus of £377bn.
“We are in an excellent position to continue to protect the 9.6 million defined benefit pension savers under our protection,” said Lisa McCrory, the PPF’s chief financial officer.
But there are fears that the improvement in funding levels could be less robust than it appears. And experts say only part of the collapse in pension values can be attributed to Kwasi Kwarteng’s mini budget.
It caused a sudden sell-off in government bonds – government bonds in which final pay plans invest heavily – and also exposed a dangerous level of leverage or borrowing hidden in the company pension system.
But Clacher said the problems with so-called liability-driven investment (LDI) strategies — used by pension plans to keep funding levels healthy — began long before Kwarteng drafted his plans.
“What the mini-budget did was add more stress to a situation that was becoming increasingly strained,” he said.
Rising food and fuel prices plus higher interest rates have put enormous pressure on final salary pensions. Independent financial adviser Brian Dennehy said: ‘A 40-year cycle of falling interest rates and falling inflation ended in 2021/22. This risk should have been taken into account in the time scales used by actuaries.’