Workplace Pensions On Track For £1 Trillion Black Hole

Gold-plated final salary pension scheme deficits are growing at the rate of £100 billion a month and stand at a staggering £710 billion.

The deficit is the amount of cash Britain’s 6,500 or so company pension schemes list as the difference between the money they are committed to pay out to retirement savers and the assets held to fund the payments.

At current rates, the deficit is set to hit £1 trillion before the end of the year.

Somewhere down the line, a massive pensions disaster is waiting to happen as companies do not have the cash to bring their schemes back into the black.

That’s bad news for hundreds of thousands of pension savers who have been promised guaranteed pension benefits by employers.

Years of problems ahead

Final salary or money purchase schemes pay a guaranteed pension income based on length of service and earnings.

The focus has shifted to pension deficits since the collapse of high street retailer British Home Stores, with a funding gap of more than £500 million.

The new figures were drafted by financial consultants PwC.

Raj Mody, partner and PwC’s global head of pensions, said: “With the prospect of further action from the Bank of England to reassure the economy in these uncertain times, the challenging environment for pension funds is likely to endure for several years.

“PwC’s recent pensions risk survey showed that half of funds had not protected themselves against falls in long-term interest rates.

Pension buy out offers

“Companies and pension fund trustees should revisit their approach to the risk profile of their pension fund. They should also ask themselves if gilt yield measurements are still relevant for them when deciding how to measure and finance the deficit. There may be more appropriate measures that are better tailored to their own fund’s strategy.”

Financial experts suggest that the figures may be worse than they seem as thousands of final salary savers are transferring out of company pensions into self-invested personal pensions (SIPPs) or overseas Qualifying Recognised Overseas Pension Scheme (QROPS).

Although SIPPs and QROPS do not guarantee a retirement income, they give savers more control over their cash and more investment opportunities to grow funds often enhanced by huge cash offers from companies to leave their schemes.