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Businesses have halved total DB pension deficits in 18 months

9 Aug 2018 By Hayley Kirton

But reduction is no reason to ‘pop the champagne corks’, experts warn, as significant shortfalls remain

Businesses have slashed their collective final salary pension deficits by almost half over the last 18 months, analysis released today has revealed – but experts are warning any celebration would be premature.

The research by Barnett Waddingham revealed the combined defined benefit (DB) deficit for FTSE 350 companies had fallen from £62bn to £35bn by the end of June. The scheme shortfalls now account for just 17 per cent of total company profits, down from 70 per cent a year and a half ago. 

The pension consultancy firm discovered the reduction was partly thanks to businesses contributing more to their schemes, with companies increasing their payments for three years running. 

However, Barnett Waddingham also noted some of the decrease was linked to better performance of investment portfolios, and that the average pension top-up represented just 10 per cent of dividends paid out. 

“With the health of the UK and global economy threatened by a lack of progress with Brexit and the threat of a trade war from Trump’s America First assault, there could a major impact on the size of pension deficits and the ability of FTSE 350 companies to pay the contributions needed to clear these,” warned Nick Griggs, partner at Barnett Waddingham. “Companies should ensure they are comfortable with the level of investment risk being taken by their DB schemes and that the appropriate controls are in place to manage these risks.”

Steve Webb, director of policy at Royal London, told People Management that although the progress was welcome, averages could be “misleading”.

“While some firms are in a much stronger place and some schemes are now in surplus, there will be others with a toxic combination of a weak employer covenant and an underfunded scheme,” the former pensions minister added. “The overall trend is very much in the right direction but it is too soon to be popping the champagne corks. “

Problems with DB pensions have been brought into the spotlight recently by the collapse of Carillion and BHS, both of which had substantial funding gaps in their schemes. The work and pensions select committee, which ran inquiries into the failings of both companies, yesterday published a string a letters relating to its inquiry into Carillion’s collapse.

Among these letters was one from Lesley Titcomb, chief executive of The Pensions Regulator, dated 23 February. This stated that the median length of recovery plans for DB pensions in deficit was seven years, while 20 per cent of schemes have a recovery plan of 10 years or longer and 5 per cent of schemes have a recovery plan of 16 years or longer.

The government is currently mulling what steps it could take to make DB schemes more secure. In March, the department for work and pensions published a white paper outlining various proposals to crackdown on bosses who mismanaged final salary schemes.

In June, the government launched the first in a series of consultations on the matter, this time considering whether the Pensions Regulator should be given greater powers. 

Meanwhile, research by Aegon, published yesterday, showed a gap between men and women’s retirement preparedness. The pensions provider discovered that 15 per cent of women have no pension arrangements, compared with 11 per cent of men.

And while 15 per cent of men had stashed away more than £300,000 in their pension – the amount Aegon calculated the average person would need to maintain their current lifestyle in retirement – just 4 per cent of women had the same amount. 

“The widening pensions saving gap between men and women shouldn’t be ignored and the sooner that women are able to engage with pension saving, the better,” said Kate Smith, head of pensions at Aegon. “Everyone should think ahead to retirement, regardless of their age or gender and when it comes to pension saving, it’s good to regularly check how much you hold in savings and where possible think about paying in more in order to have the lifestyle you want in retirement.”

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