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Companies need extra GBP10bn a year to fund new pension deficits

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The deficit of the UK’s defined benefit (DB) pension funds stood at GBP560 billion at the end of 2016, GBP90 billion higher than at the start of 2016, according to PwC’s Skyval Index.

If companies tried to repair the additional deficits which arose during 2016 within 10 years, this would cost an extra GBP10 billion per year.
 
PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s circa 6,000 DB pension funds. 
 
Raj Mody (pictured), PwC’s global head of pensions, says: “2016 saw huge change and volatility for pension funds, and the start of a renewed debate about how to measure and finance long-term pension commitments.
 
“I expect that 2017 will be the year when pension fund trustees and sponsors reach more informed conclusions about how to tackle their pension deficit and financing strategy. Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. Defined benefit pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information. There is a need to understand the cashflow profile of the fund year-by-year, not just summarised figures.”
 
While the aggregate deficit for DB pensions appears to have deteriorated considerably over 2016, the impact for individual funds will vary.
 
“Gilt yields have long been the foundation of pension deficit measurement and financing, with a belief that calibrating everything to current market expectations was the best version of the truth. This may have been ‘good enough’ as an approach in more benign market conditions, but it does not necessarily make sense to fix your strategy for the next couple of decades based on the situation at any single point in time. Now is the time for pension fund trustees to ask whether the current management information and analytics they receive is fit-for-purpose for all the decisions they need to make,” says Mody.
 
PwC notes that if companies aim to repair their pension deficits over 10 years, they will have to find an extra GBP10 billion of funding per year to do so, because of the new deficit built up over 2016. Having longer deficit repair periods in appropriate cases can help avoid undue strain on companies and economic growth.  
 
Mody says: “Last year we identified that pension funding deficits are nearly a third of UK GDP. Trying to repair that in too short a time could cause undue strain. In some situations, longer repair periods may make sense. This can help reduce cash strain by allowing the passage of more time to see if pension assets outperform relative to the prudent assumptions currently used when trustees calculate deficit financing demands. It’s not necessarily sensible to calculate deficits prudently and then ty and fund that conservative estimate too quickly. Equally, if all parties can get a realistic deficit assessment, it could well be in everyone’s interest to make that good as soon as possible.”

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