DB funds end 2016 with £560bn deficit

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The combined deficit of UK defined benefit pension funds stood at £560bn at the end of 2016, £90bn higher than at the start of the year, according to PWC.

The PWC Skyval Index, published today, says if companies tried to fix the additional deficits that arose in 2016 within 10 years, it would cost an extra £10bn per year.

The index is based on the Skyval platform used by pension funds and gives an update on the health of the approximately 6,000 DB pension funds in the UK.

DB pension funds had assets of £1,480bn at December 2016 and liabilities of £2,040bn.

A Brexit beating

The index has also tracked the impact of political events and policy decisions on DB deficits in 2016.

The Brexit vote had the biggest short-term impact on DB pension deficits in 2016 with an £80bn increase from 23 June to 24 June.

However, the deficit shifted from £620bn immediately before the US presidential election in November to £610bn immediately after.

DB pensions were also impacted by the Bank of England’s interest rate cut and quantitative easing announcement on 4 August with pension asset values increasing by £60bn over the following week, due to significant rises in bond and equity markets, but pension funding targets increased by more than double that amount (£130bn).

Dealing with deficits

PWC global pensions head Raj Mody says 2017 will see pension fund trustees and sponsors reach more informed conclusions about how to tackle their pension deficit.

Mody says: “Those involved are increasingly realising the importance of transparency in order to decide appropriate strategy. DB 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.”

He adds: “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.”