‘Tough’ year for final salary pensions

December 8, 2016 12:33 pm Published by

‘Tough’ year for final salary pensions

  • 8 December 2016
  • From the section Business

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Conditions for final-salary pension schemes will be “tough” in 2017, a review of the sector suggests, with many simply “treading water”.

The future of schemes has been in sharp focus during the year in cases such as the collapse of BHS and the future of steelworkers’ retirement deals.

The Pension Protection Fund (PPF), the sector’s lifeboat scheme, said the collective deficit was little changed.

But fluctuations since the Brexit vote and the economy would create problems.

“When we look back at what progress schemes have made over the last decade, it appears that many schemes are just treading water,” said Andrew McKinnon, chief financial officer for the PPF.

“The average recovery plan length, at around eight years, has barely improved, which brings home the challenge we now face.

“The current economic backdrop, as well as scrutiny faced by the entire industry, suggests conditions will remain tough in 2017.”

The PPF said that the collective deficit of the UK’s 5,794 final salary schemes was £222bn at the end of March, little changed from a year earlier.

However, there had been significant fluctuation since the UK referendum on membership of the EU in June, owing to the effect on investments and the value of the pound.

There are two major concerns for final-salary pension schemes, experts agree.

The first is that people are living for longer. That makes pensions more expensive for companies, because they are paying pensioners for longer.

The second is the uncertain economic outlook. Pension schemes rely on the contributions from employees being successfully invested.

Pension funds had attempted to diversify and lower the risk of these investments, the PPF said, by buying government bonds. They had also increasingly bought assets from outside of the UK.

“Pension schemes used to be owners of UK companies as well as being funded by them,” said Tom McPhail, head of retirement policy at Hargreaves Lansdown.

“Pensions being used to help finance the growth in British companies is becoming a thing of the past; instead our savings are either being lent to the government or invested abroad.”

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This post was written by FSB News