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Fairyland

Reuters: Uk 2 Trillion Pound Pension Liabilities Outstrip Gdp For First Time

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UK 2 trillion pound pension liabilities outstrip GDP for first time

British private sector defined benefit, or final salary, pension scheme liabilities of 2 trillion pounds ($3.11 trillion) have outstripped Britain's GDP for the first time due to ultra-low interest rates, pensions consultants Hymans Robertson said.

Low interest rates have meant the pension funds are struggling to make the investmenticon1.pngreturns needed to pay their pensioners.

The 2-trillion pound pension hole exceeds Britain's gross domestic product of 1.8 trillion pounds, Hymans Robertson said in a statement.

"There’s a pressing need for DB (defined benefit) schemes to focus on income-generating assets rather than simply chasing capital growth," the consultants said.

"This will help raise schemes’ resilience to poor capital returns -- avoiding any fire sale of assets at depressed prices to pay pensions."

British pension funds have increasingly been investing in higher-yielding, riskier assets such as infrastructureicon1.png or corporate debt.

Hymans Robertson said recent British pension reforms would also likely lead to 10 billion pounds in annual transfers from defined benefit schemes to defined contribution schemes, which enable retirees to spend their pension pots as they wish.

This would increase the gap between the contributions which the defined benefit pension funds receive and the benefits which they need to pay out, the firm added.

($1 = 0.6437 pounds)

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Sorry, I have no knowledge of how pension funds work. I thought 'income-generating assets' go up/down with IRs?

Edited: forgot to add no earlier.

Edited by Fairyland

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When interest rates go up this hole is likely to get bigger as profits dry up. However keeping interest rates low helps to keep making the hole bigger. Work until dead.

Certainly cause a drop in the equity markets...the UK equity market alone represents about 50% of UK pension funds.

Just the whiff of a modest US rate hike from near zero is enough to send world indicies plummeting, meanwhile the markets are hobbled by this Greek drama that is getting bloody tiresome.

I'm guessing they really can't taper away from zirp that far without having to revisit it because of collapsing asset prices in all forms. So you are left with bonds/ cash earning zero or volatile stocks earning something but subject to large falls and rises.

Edited by crashmonitor

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Certainly cause a drop in the equity markets...the UK equity market alone represents about 50% of UK pension funds.

While it used to be the case that UK pension funds held around 50% of assets in UK equities, that proportion has dropped considerably since 2000.

UKpensionfundassetallocation.gif

http://www.pensions-expert.com/Special-Features/Five-takeaways-from-this-year-s-Pensions-Fund-Indicators-report?ct=true

In the early 1990s around 30% of UK equities were held by UK pension funds, but PFs now account for less than 5%:

ICPF_UK_equities.gif

http://www.bankofengland.co.uk/publications/Documents/news/2014/dp310714.pdf

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While it used to be the case that UK pension funds held around 50% of assets in UK equities, that proportion has dropped considerably since 2000.

UKpensionfundassetallocation.gif

http://www.pensions-expert.com/Special-Features/Five-takeaways-from-this-year-s-Pensions-Fund-Indicators-report?ct=true

In the early 1990s around 30% of UK equities were held by UK pension funds, but PFs now account for less than 5%:

ICPF_UK_equities.gif

http://www.bankofengland.co.uk/publications/Documents/news/2014/dp310714.pdf

Thanks FT, that's an interesting chart, I stand corrected.

It still leave the equity component at almost half, so they are still struggling unless equity markets and interest rates can rise in tandem. Guess we need some serious amount of global recovery going forward.

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While it used to be the case that UK pension funds held around 50% of assets in UK equities, that proportion has dropped considerably since 2000.

http://www.pensions-expert.com/Special-Features/Five-takeaways-from-this-year-s-Pensions-Fund-Indicators-report?ct=true

In the early 1990s around 30% of UK equities were held by UK pension funds, but PFs now account for less than 5%

http://www.bankofengland.co.uk/publications/Documents/news/2014/dp310714.pdf

Thanks FT, that's an interesting chart, I stand corrected.

It still leave the equity component at almost half, so they are still struggling unless equity markets and interest rates can rise in tandem. Guess we need some serious amount of global recovery going forward.

Wonder what their exposure to HK and Shanghai works out at?

CSP-88_cover-image_stock-market-trading-

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Wonder what their exposure to HK and Shanghai works out at?

CSP-88_cover-image_stock-market-trading-

Rather worrying that we still have a two trillion deficit in spite of a six year equity bull, not least the Asian market and the 100% increase in Shanghai over the last year. Looks like those housewives are filling their boots anyway.

Edited by crashmonitor

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Call or justification for IR hike?

This has been an issue that had to come out....without the returns, there will be defaults on the pensions.

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Thanks FT, that's an interesting chart, I stand corrected.

It still leave the equity component at almost half, so they are still struggling unless equity markets and interest rates can rise in tandem. Guess we need some serious amount of global recovery going forward.

Not necessarily. Remember that a rise in interest rates will result in a reduction of pension scheme section 179 liabilities due to the higher discount rate.

The Pension Protection Fund / Pension Regulator have published the following 'rules of thumb' table in their Purple Book to indicate the net effect of changes in gilt yields and equity prices on scheme liabilities:

PPF_rules_of_thumb.gif

So, based on the March 2014 position, a rise in gilt yields of 0.3% together with a 7.5% fall in equities would result in a fall in s179 net liabs of around £20bn.

Edit: added 'net' to last sentence to make clear that we're talking about pension fund net assets/labilities (i.e. surplus/deficit).

Edited by FreeTrader

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