During August 2016 Britain’s pensions deficits reached a record £459 billion as the interest rate cut sent liabilities soaring. FTSE 100 firms’ deficits were also at record breaking levels, estimated to be £46 billion in July this year, as opposed to £25 billion in 2015, and set to increase to £63 billion by the end of August.
There are a number of factors which have come into play that have seen pension deficit levels increase so dramatically since the global financial crash around 2007/8, when there was once a surplus. But what does this mean for the everyday worker or investor? And what can you do?
The pension scheme deficit is essentially the difference between all UK firms’ assets and liabilities, with the combined total of this adding up to the £459 billion figure. The performance of assets depends on stocks and bonds, while liabilities are dependent on government bond yields.
There was a rush for safe haven bonds, which sent yields for sovereign bonds through the floor, resulting in reduced pension funds. Brexit has had a large impact as well, with the sterling fall because of it leading to a partial offset. Due to this the Bank of England also cut interest rates, leading to bond yields falling even further.
Such large pensions deficits are also threatening dividend cuts at UK companies. More money is needed to meet the costs of pensions benefits and one way of achieving this is likely going to be through dividend cuts.
Eventually this could mean job cuts, as companies cut back to be able to afford their pension funds. Another way is that some investors are already taking action and selling shares in businesses they believe will be worst hit by the pensions deficit. This could lead to job losses at the firm being invested in.
This pensions deficit will affect millions of workers, depending on when your retirement is set for. Most will be hoping that the situation improves by the time it comes to cashing out their pension but there are other options to further safeguard your financial future.
Opening a self-invested personal pension (SIPP) with Bestinvest will keep it away from the general pensions deficit problem. SIPPs can be invested in shares, bonds and alternative investments like precious metals or property – although these possess a bit more risk. Consider making a personal pension pot to prevent the negative effects this deficit could provide.
This post is in association with Bestinvest