UK Pensions.. Lots of big numbers but what does it mean?
Houston we have a problem... or do we?
I apologise in advance for the factual data in this article but it is worth knowing these things in my line of work.
When I started in wealth management at the end of 2017 I heard a lot about the underfunded status of a lot of the UK final salary pension schemes - basically there is not enough money to pay retiring members and not enough new joiners contributing to help make up shortfalls. It is one of the main reasons why the old Defined Benefit/final salary schemes started getting phased out.
As an aside to the main point of this article ...Technically in my opinion the reason why most of these schemes are closing is down to a one eyed unsmiling Jock called Gordon. Back in 1997 clutching a little red briefcase he decided to change the taxation relief rules for dividends on shares held by pension funds.
A geezer from the Institute of Actuaries called Terry Arthur (I imagine him wearing a sheepskin coat smoking a cigar) back in 2006 calculated that the one eyed pirate had caused 150 billion quids worth of losses in pension schemes since he adopted the ACT tax change in 1997. I attach here a handy little inflation adjusted chart showing that in today's money Gordy blew away 204 billion pounds. This doesn't take into account investment growth of the lost money either. Lovely fella. And lets not mention the gold shall we. Two interesting facts about him are that he studied history at Edinburgh and that Margarita crown Princess of Romania used to be his girlfriend (Think the Cheeky Girls in a Tiara - she binned him for talking about politics all the time). I did nearly book Cheeky Girls for a party when I was broking Romanian Leu but that is a story for another time
Lets have a look at some scary numbers. As of 2018 there were around 7,600,000,000,000 pounds worth of pension liabilities in the UK according to the Office for National Statistics. Approximately £4,000,000,000,000 is unfunded (4 trillion pounds) that is the equivalent of 212% of the country's GDP.
A really scary statistic in all of this is that a third of UK workers did not have any form of pension in place (although the statistics were gathered halfway through the rollout of automatic enrolment rules)
Unfunded public sector pension liabilities – including provision for teachers and National Health Service staff – totalled £917bn. There is a massive kerfuffle going on in private schools about the raising of allocations for teaching staff across the UK as many of them work to very tight budgets.
Clearly retirement ages are going to have to rise.
Lets have a look at company pensions. A lot of the bad news you see today is scammers persuading people to move out of 'trusted' schemes and disappearing off with their money. If we put that aside and consider I am not one of those guys (I work very hard to help people make money - my clients will tell you I am a bit autistic that way ).
There is some good news to go with the bad news. According to the LCP annual account for pensions report (the market bible for UK FTSE pensions) in 2018 and now continuing into the 2019 calendar FTSE 100 companies are operating a pension accounting surplus.
A key takeaway for me from this report is that FTSE 100 companies pension schemes are reportedly holding less than 20% of their assets in equities. I have a fear that growth prospects for UK funds will be dented by this defensive strategy.
Also life expectancy in the UK has gone down from 87.8 years to 87.5.
Only 2 of the entire FTSE 100 schemes offer defined benefit pension schemes to new employees (thanks Gordy). Well done to anyone working for Croda or Johnson Matthey.
In the UK there are 5,450 DB pension schemes according to Price Waterhouse Skyval index holding assets of £1.66 trillion with liabilities of £1.84 trillion. That means there is a shortfall of 180 billion quid. If life expectancy drops more this deficit will reduce further.
I will dig out a list of individual companies running deficits in a later post. These would be the ones that would possibly be worth considering asking for transfer values from if you worked there in the past.
I think that is enough exciting data for one rainy Sunday.. Have a great week.
I leave you with a picture of Dodger the rescue Beagle who is very much on the naughty step this weekend.
Don
