Businesses must find £10bn a year to cover Brexit pension shortfall, report

Pensions have been under the spotlight. Picture: Kirsty O'Connor/PA Wire

Pensions have been under the spotlight. Picture: Kirsty O'Connor/PA Wire - Credit: PA

British businesses need to stump up an extra £10bn per year over the next decade to cover the pension deficits built up in the aftermath of the Brexit vote.

The shortfall for defined benefit pensions schemes - which guarantees a retirement income linked to final salaries – jumped by £90bn last year to stand at £560bn by the end of 2016 amid a notable drop in British government bond yields and a cut to interest rates.

'If companies tried to repair the additional deficits which arose during 2016 within 10 years, this would cost an extra £10bn per year,' a report by PwC said.

It showed that the referendum alone sparked an £80bn shortfall within just 24 hours, with the deficit rising from £510bn to £590bn between June 23 and June 24.

It was made worse following the Bank of England's post-Brexit stimulus package, which cut the benchmark interest rate to a record low of 0.25%, ramped up its quantitative easing (QE) programme - which sees the bank print money to buy government bonds – by £60bn to £435bn, and began a £10bn corporate debt purchasing scheme.

That move in early August decreased yields by making bonds and stocks more expensive, which ultimately bit into financial returns. The cut to interest rates also hurt returns on cash deposits.

PwC's Skyval Index, which gives a snapshot of the health of the UK's 6,000 defined benefit pension funds, shows that the deficit peaked at £710bn at the end of August before staging a slight recovery in the final months of the year.

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By the end of December, that shortfall was still £90bn higher than the start of 2016, posing a major issue for companies offering defined benefit schemes to their employees.

A number of companies have seen the size of their pension black holes balloon, with BT recently revealing that its pension deficit surged to £9.5bn at the end of September from £6.2bn three months earlier.

Barclays has also seen its pension fund slip into the red by £1.1bn from a surplus of £800 million last December, while Debenhams likewise suffered a reversal to a £4.1m deficit in September against a surplus of £26.2m in August last year.

Royal Mail has controversially proposing to move workers from a defined benefit scheme to a defined contribution plan, saying that the current arrangement is quickly becoming unaffordable.

Contribution plans see the company and employees pay into a pension pot with no guarantees as to what the pension payout will be.

Royal Mail said it pays out £400m in pensions contributions each year and expects that total to more than double to more than £1 billion after March next year.

Raj Mody, PwC's global head of pensions, said: '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.'