Digging a Deeper Hole: UK Pension Schemes and the Implications of Brexit

Digging a Deeper Hole: UK Pension Schemes and the Implications of Brexit


Steve Baker, Authorised Financial Adviser, Saturn Advice

The UK’s Brexit vote has wide ranging implications in a number of areas. In this article, Steve investigates what this might mean for UK Final Salary Pension Schemes.

The UK Pensions Minister, Ros Altmann, has been quoted as saying that there is a “delicate balancing act” required to maintain the strength of pension schemes amid the uncertainty of Brexit, with some companies under pressure to keep the deficits within their final salary pension schemes under control.

Ms Altmann told BBC Radio 4’s Money Box: “It is important when the government, in making its plans for the future, recognises that employers really are having, in some cases, a very difficult time, supporting the pension promises they have made”.

This issue has been highlighted by two recent cases; the failure of British Home Stores (BHS) which reportedly had a huge, £571m shortfall in its pension scheme funding and secondly, concerns that the British Steel Pension Scheme deficit of some £485m may be putting off potential buyers of Tata Steel’s UK business, particularly as this pension deficit is now likely to grow.

A recent article by Nigel Green, the CEO of independent consultants deVere Group, raises further concerns over the future viability of UK final salary schemes and the risk to their members following the Brexit vote. He comments on some key factors that “could seriously derail people’s retirement plans”.

Gilt (UK Government Bond) yields have reduced considerably, meaning that pension scheme deficits have been driven up further. This places additional strain on employers sponsoring final salary schemes. It was widely reported in early July that the UK’s pension funding hole has hit a record high of £935 billion. This is now likely to grow and exceed £1trillion (for context that is £1,000,000,000,000) and must bring into question the very survival of many company pension schemes or at the very least could well mean that the terms of employee’s pension scheme benefits would have to change.

Another issue is the Pension Protection Fund (PPF), the UK government protection mechanism which steps in if the sponsoring employer of a final salary scheme goes bankrupt and cannot meet its pension scheme liabilities. According to Mr Green, the PPF is “close to sinking and simply isn’t in a position to handle any further high-profile collapses.

The Catch 22 when considering the PPF is that it is funded by levies charged to UK pension schemes, which in turn increases the costs on the very schemes that may need to claim on it!

One final consideration is the effect of the value of the assets that the schemes invest in. With volatile investment markets and a devalued Sterling expected to persist for the foreseeable future, final salary scheme actuaries will need to re-consider the returns they assumed at the scheme’s last valuation date. Any reduction in assumed investment returns means that additional funding by the sponsoring employer is needed, another extra cost.

The full ramifications of Brexit on pension schemes will only be felt over a period of years but by that time it is possible and maybe even probable, that schemes may have already gone beyond the point of no return.

One opportunity open to members of these schemes is a transfer to another scheme and to this end a consequence of reduced gilt yields is that transfer values have been driven up. This is good news for those ex-UK residents who have or will now be considering a transfer to a qualifying Recognised Overseas Pension Scheme (ROPS). However these larger transfer value payouts will in turn put further pressure on the pension schemes themselves, many of which are woefully underfunded.

This means that as more and more individuals seek to secure a transfer, the more likely it is that schemes will run into liquidity problems and could seek to freeze transfers altogether.

Your UK pension is a valuable asset. If you would like to discuss your own personal situation, the implications of Brexit and potential options tailored to your personal circumstances, please contact Steve Baker on 03 343 7361 or at steve@saturnportfolio.co.nz