The behemoth of pension deficits shows no sign of turning tail for top FTSE companies.
In fact, according to recent analysis by one leading firm of employee benefits and pension scheme specialists, the total pension liability facing FTSE 350 companies soared to £62bn in 2016.
That’s around 70 per cent of the combined pre-tax profits of the index’s companies.
If you are a member of a defined benefits scheme belonging to one of these companies, the danger that this threatens, combined with the boost to available transfer values brought about by the still very low yields of gilts, provides a double-edged reason to think hard about the possibility of transferring out of the scheme and into a Personal Pension Plan.
Acceleration in rise of pension deficits.
A recent report from the Barnett Waddingham consultancy shows that the combined pension deficit of the FTSE 350 rose by £12bn in 2016.
The concern that surrounds this representing 70% of pre-tax profits is highlighted by comparison with the data for 2011, when deficits in the schemes of the FTSE 350 were equal to just 25% of profits.
Amongst FTSE 100 companies, the news is even more worrying. Their liabilities, as reported by JLT Employee Benefits, rose £95bn, or 16.2%, during 2016 to reach £681bn.
Ten of the FTSE 100 companies are now confronted by deficits that dwarf their stock market value.
Low gilt yields, scheme closures (meaning these funds gain no new money from current employees) and the burden imposed by increased life expectancies requiring longer pay-outs all present huge challenges for scheme operators, fuelling further growth of deficits.
Low gilt yields still a key moment of opportunity.
Like other industry experts, we’ve been drawing clients’ attention for some time now to the window of opportunity presented by the low yields being delivered by gilts.
Transfer values are arrived at by calculating the amount of capital that a member would need in order to attain an equivalent annual pension to that which they would get if they stayed in the defined benefits scheme in question. This is worked out using the assumed rate of annual return on gilts.
Thus, the current low yields have the effect of pushing up the transfer value available to investors choosing to exit and take advantage of the control and flexibility offered by a Personal Pension Plan.
“We’re drawing the attention of clients who have holdings in company defined benefits (final salary) schemes, to the very realistic possibility that, were the scheme eventually to become too great a burden on the company, it could drive it into insolvency,” says our Senior Regional Managing Partner, Moheen Ahmed. “If that were to happen, the pension scheme may be placed in the Pension Protection Fund. At that stage, benefits could suffer a significant reduction.”
Consider a transfer. Make time while there is time.
Our view at PWS is that defined benefits pension schemes, an icon of corporate prosperity in the seventies and eighties, are probably close to extinction.
The combination of markets and pressures has made their liability simply unsustainable.
If you are a member of such a scheme from employment earlier in your career, now could be a good time to protect your savings and gain increased flexibility by transferring to a Personal Pension Plan.
“Even for the best intentioned of us, it’s easy to put off actually doing anything in situations like this,” Moheen observes. “But it would be regrettable to find your savings impacted by the failure of a scheme you could have exited, had you acted at the right time”,
If you are a PWS client, do speak to your Advisor about whether transferring would be a wise course of action for you.
If you’re not currently a PWS client, do still feel free to contact us. We’re always pleased to offer advice.