The U.K.'s 6,000 private sector DB schemes covering £1.6 trillion of pensions obligations will be in for a rough ride hit with the prospect of higher inflation, and an expected fall off in pension asset values over the next couple of years. Long end government bond yields will likely stay stubbornly low keeping pension liability values high and meaning pension deficits are likely to increase and be more volatile. The PPF index at the end of May already showed 4 in every 5 schemes were underfunded with an aggregate deficit of £320 billion near all time highs.
“With some 2,000 schemes due to have a funding review in the next 12 months UK businesses will be under pressure to divert cash to shore up historic pension liabilities.”
David Fairs, Partner, KPMG on the impact on pension savers: “As the UK votes for Brexit, those expecting to retire shortly will find a volatile backdrop that will make it difficult to plan for retirement in the short term. Deferring retirement until markets stabilise might be a sensible decision although there might well be short term opportunities to bag a bargain in volatile markets if interest rates rise and they have overseas holdings.
“Those saving for retirement might now need to rethink their investment strategy as the pound adjusts. Overseas investments might appear expensive in the short term. In the longer term, the challenge of whether the UK will grow faster or slower, will be a conundrum. With a falling pound, a higher rate of inflation would be expected eroding the purchasing power of pensions in payment because most individuals shun purchasing inflation protection. Although those who have a public sector pension will be much better protected as their pensions are largely inflation protected.
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