The £75bn hidden pensions cost of the pandemic
The £75bn hidden pensions cost of the pandemic
23 Mar 2022
- On the two-year anniversary of the UK entering its first lockdown pension scheme deficits against long-term funding targets have reduced by £195bn, XPS Pensions Group’s DB:UK reveals.
- Whilst schemes’ positions have improved substantially since the first lockdown in March 2020, long-term deficits are still £150bn higher than what we would have expected in the absence of the pandemic. This could set back schemes’ progress in achieving their long-term funding targets by as much as 10 years**.
- If employers maintain their contributions this would reduce the term by 6 years, with schemes projected to reach their long-term targets in 2029. But this will cost sponsoring employers over £75bn.
Since the first lockdown was announced in March 2020, gilt yields and long-term inflation expectations have risen by 1.1%, reducing the value of the liabilities for most pension schemes. The strong recovery of markets in the two years since have meant that UK deficits have recovered by £195bn*. Based on assets of £1,742bn and liabilities of £2,034bn, the average funding level of UK pension schemes on a long-term target basis was 86% as of mid-March 2022.
However, recent rises in long-term inflation expectations and lower projected investment returns have set back schemes’ progress in achieving their long-term funding targets by as much as 10 years**.
In December 2019, XPS Pensions Group projected that deficits of pension schemes would reduce by £100bn over the period to March 2022 as employers paid in contributions and scheme assets delivered investment returns. However, deficits are in fact £50bn higher than they were in December 2019, meaning that schemes are £150bn worse off than projected*.
These projections assume that employers put money into the schemes until the end of existing agreed recovery plans2. Employers maintaining contributions for longer could help to reduce the term by 6 years, with the average scheme expected to reach their long-term targets in 2029. However, pursuing this strategy would cost sponsoring employers nearly £75bn.
Charlotte Jones, Senior Consultant at XPS said:
“Whilst it might be comforting to many schemes that their deficits haven’t increased markedly after a difficult two years, it’s easy to forget that the pandemic has taken its toll on their long-term funding journey. With high inflation and market uncertainty set to continue, trustees need to be carefully monitoring their funding position and investment strategy to ensure their long-term plan remains on track.”
Notes
*Figure 1 – UK DB Pension scheme deficits
**Figure 2 – Projected time to reach long-term funding targets
XPS’s DB:UK Funding Watch monitors the combined deficit and funding level of UK defined benefit (DB) pension schemes (i.e. all registrable schemes - including hybrids) on a long-term target basis using a discount rate of Gilts + 0.5%. It combines XPS’s market leading Member Analytics and the award-winning journey planning tool, Radar, enabling real time monitoring of changes and analysis of the reasons behind any movement.