Further increase in private-sector pension deficit

| May 8, 2012 | 0 Comments
Further increase in private-sector pension deficit

New reports suggest that the deficit of private-sector, final-salary, pension schemes has increased again, with industry experts suggesting that this type of pension may have disappeared by 2020.

The latest figures from the Pension Protection Fund (PPF), which provides compensation to members of eligible defined benefit pension schemes if an employer becomes insolvent, show that the deficit increased to £217bn in April, compared with just £8bn a year ago.

The PPF attributes the increase to the Bank of England’s quantitative easing (QE) programme which has driven up the price of government bonds known as gilts.

As these bonds pay a fixed income, QE has reduced the yield that investors, including insurers, gain by buying them, which makes the cost of paying for pensions more expensive.

Meanwhile, consultancy JLT Pension Capital Strategies estimates that the combined deficit of the UK’s private sector defined benefit pension schemes has increased from £77bn in 2011 to £172bn in 2012.

The pressures on private-sector final salary pension schemes have increased to the extent that the Pensions Policy Institute (PPI) estimates that they could be virtually extinct by 2020.

The organisation estimates that that final salary pension schemes will have just 1 million active members by 2020, compared with 15 million in defined contribution pensions.

Many companies have already closed these schemes to new employees and frozen them for existing staff.

The PPI warns that the situation could be disastrous for retirees, with many people finding they are retiring on smaller pensions than they anticipated.

The government is taking steps to address the potential crisis in private sector pensions with the introduction of auto-enrolment in October.

The will mean that the majority of private sector workers will become part of a pension scheme, to which both the employer and employee will be required to contribute.

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