Companies need extra £10bn per year for next decade to fund new pension deficits, says PwC

The global accountancy firm reports that if companies tried to repair the additional deficits which arose during 2016 within 10 years, this would cost an extra £10 billion per year.

PwC’s Skyval Index, based on the Skyval platform used by pension funds, provides an aggregate health check of the UK’s c.6,000 DB pension funds. The current Skyval Index figures are:

The funding measure is the approach used by pension fund trustees to determine company cash contributions (see notes to editor for definitions on deficit measures).

Key 2016 activity included:

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. Defined Benefit pensions are long-term commitments stretching out over several decades and so there is limited value in pension funds making decisions based on simplified information. There is a need to understand the cashflow profile of the fund year-by-year, not just summarised figures.” While the aggregate deficit for DB pensions appears to have deteriorated considerably over 2016, the impact for individual funds will vary.”

Mr Mody added: “Gilt yields have long been the foundation of pension deficit measurement and financing, with a belief that calibrating everything to current market expectations was the best version of the truth. This may have been ‘good enough’ as an approach in more benign market conditions, but it does not necessarily make sense to fix your strategy for the next couple of decades based on the situation at any single point in time. Now is the time for pension fund trustees to ask whether the current management information and analytics they receive is fit-for-purpose for all the decisions they need to make.”

PwC notes that, if companies aim to repair their pension deficits over 10 years, they will have to find an extra £10bn of funding per year to do so, because of the new deficit built up over 2016. Having longer deficit repair periods in appropriate cases can help avoid undue strain on companies and economic growth.

Mr Mody concluded: “Last year we identified that pension funding deficits are nearly a third of UK GDP. Trying to repair that in too short a time could cause undue strain. In some situations, longer repair periods may make sense. This can help reduce cash strain by allowing the passage of more time to see if pension assets outperform relative to the prudent assumptions currently used when trustees calculate deficit financing demands. It’s not necessarily sensible to calculate deficits prudently and then ty and fund that conservative estimate too quickly. Equally, if all parties can get a realistic deficit assessment, it could well be in everyone’s interest to make that good as soon as possible.”