Final salary pension schemes balckhole

kingrulzuk

Today one of my work colleague at lunch time was talking about something to do with Final salary pension schemes balckhole, he was saying he had read it on the news. I did not get a change to ask him what he was talking about. so I checked the net: http://www.thisismoney.co.uk/money/news/article-3717212/Black-hole-Britain-s-final-salary-pension-schemes-soars-record-390bn.html

dunstonh

The "black hole" is not as black as made out. Assumptions used to calculate the figures have been getting consistently lower on the rate of return and higher on things like longevity. Plus, the way the liabilities have to be calculated is not really sensible for the current economic position. So, that has pushed liabilities up rather than there actually being a shortfall of money. Now, if everyone was to opt out and transfer out then that would be a different matter.

In really really simple terms, its like having £100,000 in your bank knowing you have to pay a future bill. However, next year, you now have £110,000 in your bank and still have the same bill to pay. Except that the accountant says that the bill you need top pay used an assumption of 5%p.a. growth. We are going to use 4% as an assumption now so you need to put a bit more aside just in case or you have shortfall. The following year, you have £120,000 and the account again says to you that you need little bit more just in case as they are now using 3% as assumed growth rate.

The assumptions used historically were higher than they ought to have been. The assumptions we use today are probably lower than they ought to be.

The shortfall using those assumptions is only 14% of the overall value. Investment values can move around that much in a year. Indeed last Autumn, there was a 20% stockmarket crash. That has recovered. However Sterling has recently fallen by more than that. So, the assets that make up the value move around on a daily basis. When the figures are as large of £2658 billion, then very small swings can result in very large figures being quoted.

minty777

http://www.telegraph.co.uk/pensions-retirement/news/the-1-trillion-pension-crisis-facing-11m-and-theyre-the-lucky-on/

PensionTech

The Telegraph article says: "Pressure is mounting on the Government to oversee a root-and-branch overhaul of Britain’s company pension schemes in which more than 11 million workers have savings."

They're a little late: http://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2015/british-steel-pension-scheme-16-17/

Also I'm pretty sure that the £1tn number is either:
- the aggregate deficit of all schemes in deficit, rather than the aggregate deficit of all schemes (including those in surplus), or
- the aggregate deficit on an unrepresentative e.g. buyout basis, or
- both.

Not to say that the UK DB pensions deficit isn't still huge, though - it absolutely is. dunstonh is right in pointing out that these things depend hugely on current market conditions and the assumptions being made aren't necessarily going to be borne out in the long run. That said, we've been expecting a recovery in gilts/interest rates for quite some time. It's not happened yet, and Brexit is probably going to delay it even further, so perhaps we shouldn't be too complacent about future performance.

Still, to be honest, I'm not sure what question or discussion is being put forward by posts #1 and #3. Yes, DB pensions in general are looking pretty rickety at the moment, though individual scheme health, and how well they can tolerate deficits, varies massively. How dangerous the current state of affairs is depends on your outlook, and newspapers get more attention screaming about crises than being level-headed. The PPF is still there and doesn't seem to be outwardly panicking. Is there a specific point being made?