The collapse of BHS and the recriminations it has faced over its pension deficit has highlighted just how serious the issue of pension deficits are. If your pension is tied to a company who operates a considerable pension deficit, you could easily see a considerable loss in pension fund. New figures produced by Mercer, show the pension deficit among UK firms is currently at £92bn.
What is the Pension Deficit?
The deficit is caused by a difference between assets and liabilities of UK firms. Asset performance is determined by the stocks and bonds in which the schemes are invested. Liabilities are determined by UK government bond yields. These value the present value of future pension liabilities. The lower the bond yields, the greater UK firm liabilities are.
Other Factors of Pension Deficit
Another reason for the huge pension deficit figure is the way pensions were handled historically. BHS would have put together generous schemes that were made when our life expectancy was not as high as it is today. As the years have gone by, more and more strain has been put on the schemes that were never designed to operate for so long.
In recent times, managers have given shareholders overly generous payouts despite businesses operating at a high pension deficit. Couple this with stock market underperformance and we have a recipe for deficit.
Quantitative Easing (QE) has arguably had an impact too. This is the Bank of England’s money printing policy and some have pointed the finger of blame at the bank, highlighting that this holds down the value of bonds. The deficits before QE and the financial crash in 2007 have increased the deficit by £50bn.
More recently questions over whether or not the UK remains in Europe also have affected bond yields, lessening their value and widening the pension deficit.
How do I Avoid Being a Pension Deficit Victim?
The best option is to use a financial planner to help you chose the best financial products that take into account your personal circumstances and your goals in retirement. Do you want to put your grandchildren through university? Do you want to go on two holidays a year? Are you worried about tax?
My award winning financial planning advice can help you achieve a better retirement. We can look at where you are now, what you have with your pension funds and decide what is at risk. Then we shall come up with a viable plan to make your pension fund more stable and less at risk from deficits and other factors that we can do little about. Click here and complete the Call Back Service form to begin.