Uk Pensions Are 'back In The Red' (net 41bn Deficit)

[Ash4781]

http://news.bbc.co.uk/1/hi/business/7543828.stm

UK pension funds are back in the red after the biggest 12-month swing in funding levels since current accounting methods were introduced in 2002.

Actuarial group Lane Clark & Peacock (LCP) found that the pension funds of the UK's top 100 companies had a net deficit of £41bn in mid-July.

This was a swing from the £12bn surplus of mid-July 2007 which had been the first surplus for five years.

But the report said that the position could have been far worse.

'Volatility'

The annual Accounting for Pensions report said that the credit crunch, equity market volatility and rises in expected inflation had all played their part in severe swings in funding levels.

The position could have been worse, but for companies pumping nearly £40bn into their pension schemes over the last three years and taking some steps to reduce risk.

Bob Scott, partner at LCP, said that the brief period of surplus until early 2008 had allowed some companies to take the opportunity to cut down on these risks.

But he was keen to give a warning about the future for these funds.

"No sooner have companies breathed a sigh of relief about returning to surplus but they are back to multi-billion pound deficits," he said.

"With a possible recession looming and the threat of further regulatory intervention, the outlook for continuing defined benefit provision seems rather bleak."

Edited August 6, 2008 by Ash4781

[Joey Buttafueco Jr]

http://news.bbc.co.uk/1/hi/business/7543828.stm

I'm guessing that when the FTSE goes up again these deficits will disappear.

[interestrateripoff]

I'm guessing that when the FTSE goes up again these deficits will disappear.

I think that depends on how high ftse goes up and how bad the recession is, if the deficit lasts long enough will these pension scheme require a cash injection? If so where will the money come from?

I suppose now everyone will have to start paying even more into their pension pot? Something else to be added to living expenses.

I've been predicting this would happen all year, yet another problem for Mystic Merv. Not for him personally as he's got a very nice pension thanks to the cuddle taxpayer.

“Northern unemployment is an acceptable price to pay for curbing southern inflation” Eddie George former Governor of the Bank of England

Pension deficits are an acceptable price to pay for curbing inflation.

[Justice]

Yes i've been warning you all about Zurich pensions who have the paper tager, the FSA looking into them and they will protect the company by telling them how to do things in such a way as to not get into too much trouble when it goes bang.

Not only is stock going down but people have cut back hard on 'Investing' in pensions and on top of that account costs eat away further so making losses biger.

Time to get out if you can but don't ask me where to put your money as the game seems too fixed.

[patprimer74]

Uk Pensions Are 'back In The Red'

Of course, they are! That's how the system works. Part of the time they're in the black and part of the time in red. (Investments go up and they go down - hadn't you heard?) If they were always in the black it would mean they were over-provided and if always in the red, the opposite.

They're swinging between positive and negative which shows their just about right.

What's the problem?

p

[Joey Buttafueco Jr]

Of course, they are! That's how the system works. Part of the time they're in the black and part of the time in red. (Investments go up and they go down - hadn't you heard?) If they were always in the black it would mean they were over-provided and if always in the red, the opposite.

They're swinging between positive and negative which shows their just about right.

What's the problem?

p

Exactly. it's non news

[Nicholas Cage]

Exactly. it's non news

It's about volatility, also the pension companies have been lending out shares for shorting in huge amounts. Showing they have a long term view of recovery as always

but expect falls right now.

[patprimer74]

Time to get out if you can but don't ask me where to put your money as the game seems too fixed.

I assume you're recommending BTL investment, Justice!

p

[Bloo Loo]

Exactly. it's non news

doesnt mean the government cant set out a rescue package and TV air time to really make it worse!

[BoomBoom]

Exactly. it's non news

I see our resident city boy ramper once again strains the bounds of economic illiteracy. This isn't like Mother Brown being 5 quid short on the gas bill, this is a massive shortfall in the pensions system, and likely to get much larger. It may not be news to you, but to those whose retirement is dependent upon these funds it sure is.

[PopGun]

I see our resident city boy ramper once again strains the bounds of economic illiteracy. This isn't like Mother Brown being 5 quid short on the gas bill, this is a massive shortfall in the pensions system, and likely to get much larger. It may not be news to you, but to those whose retirement is dependent upon these funds it sure is.

As if they care about that Boom, boom.

As soon as this pyramid scam crumbles to dust the better. Sure it will really hurt people at first, but it will stop future generations from funding this racket!

I've got better things to do with a third of my monthly income, such as pay bills etc.

Edited August 6, 2008 by bloodsucked

[crashmonitor]

Just 4% of the trillion pound public sector super-ann deficit.But that can be paid out of future earnings of generation x and y,so its all hunky dory on that front I suppose.

[Optobear]

It's about volatility, also the pension companies have been lending out shares for shorting in huge amounts. Showing they have a long term view of recovery as always

but expect falls right now.

I fear that is not the issue. I suspect the pension funds got out of shares and into mortgage backed securities. They were packaged to be safe (well not actually safe, but to have AAA ratings), look like bonds (and so be inversely correlated with shares), and had longish maturities as appropriate for pension liabilities. So the whole credit bubble was set up to pass off lots of the packaged mortgages to the very pension funds that are now in deficit.

It may well not be the case that a recovering stock market will save them.

Does anyone know how much of these falls are down to falling share prices, and how much due to lower values on structured credit products?

Someone on here must be involved in a pension fund, either as a manager or as a trustee?

[MongerOfDoom]

Of course, they are! That's how the system works. Part of the time they're in the black and part of the time in red. (Investments go up and they go down - hadn't you heard?)

So they are now guaranteed to go back up and no-one needs to worry even a little bit?

If they were always in the black it would mean they were over-provided and if always in the red, the opposite.

They're swinging between positive and negative which shows their just about right.

That is only fine if the volatility is small and any shortfall can be easily paid off.

What's the problem?

Only that there may not be enough money to pay pensions that were promised and that people naively expect to receive. Other than that everything is fine.

[Nicholas Cage]

I fear that is not the issue.

I was talking about recently,

The quote is

"Not only have we had fears of rising inflation, which has driven up the liabilities of pension funds and the amounts

companies need to hold, but the stock markets have been volatile, and recent falls have reduced the value of the assets,"

said Bob Scott, a senior partner at LCP.

The volatility has been so huge with shorting both sides of the pond are now trying to control it. The pension funds

provide the shares, long term the value should increase with the holding size.

[patprimer74]

Only that there may not be enough money to pay pensions that were promised and that people naively expect to receive. Other than that everything is fine.

Then, it's quite simple. Every time they go negative, get all the participants i.e. employers and employees to dip into their pockets to bring them back up. Once they go into excess, give them payment holidays (or give them cash!). Everyone would love being messed about like that! Alternatively, act sensibly and don't get too excited about a drift in either direction - unless it gets out of hand. After all, these are issues that last decades.

p

[Optimuswolf]

The cost of running a DB pension scheme has been rising for quite some time with long term bond yields falling, longevity increasing and a poorer performing stock market. But many employers have taken this very seriously and pumped in extra money, resulting in the surplus of last year. The current deficit isn't necessarily a problem with recent volatility but makes good easy headlines.

And we should note that there is an insurance scheme running for DB schemes called the pension protection fund, which takes money off schemes (worsening the deficit I know) to cover failing schemes, as well as pressuring pension sponsors to put their schemes back in the black if they have a troubling deficit.

[Tiger Woods?]

Exactly. it's non news

The market is still currently overblown, and yet they are in the red already...ffs, when the dust has settled on this they will be in the infrared. What also has to be taken into consideration is that over the last decade many companies have unilaterally lowered their pension benefits to the employees...so they are in the red on pensions that although technically were in the black, were already underfunded relative to the initial promises. My gfs current employer started her on a finally salary scheme, but then capped it at her then current salary which is the adjusted by an inflation measure and not the actual change in equivalent salaries, but her contributions rise in line with her salary (until it becomes completely uneconomic and she bails out of the scheme hence reducing their liability). This sort of actuarial/accountancy fiddles and a post 2003 boom in markets are what have been keeping pensions in the black. The point that a well managed scheme should oscillate between the red and black is completely trite...this would only be a reasonable argument if the benefits and other "rules" weren't continually shifting.

[Optimuswolf]

Then, it's quite simple. Every time they go negative, get all the participants i.e. employers and employees to dip into their pockets to bring them back up. Once they go into excess, give them payment holidays (or give them cash!). Everyone would love being messed about like that! Alternatively, act sensibly and don't get too excited about a drift in either direction - unless it gets out of hand. After all, these are issues that last decades.

p

This is very well put. Pensions issues move at a glacial pace, very slowly but with great force. The key is to spot any long term issues, not worry because one study finds that at one day in 2008 pension schemes are in deficit.

[interestrateripoff]

http://www.moneyweek.com/file/51778/why-th...ur-pension.html

While headlines about possible stamp duty reprieves, and the taxpayer being on the hook for yet more of the national disaster that is Northern Rock are vying for our attention, another much more worrying development has been creeping up on the outside.

Big company pension schemes have now gone under water again. In other words, deficits are back. And that could spark even more trouble ahead for beleaguered UK Plc – and maybe for your own pension, too.

Falling equity markets and rising inflation have joined forces to push the pension schemes of the UK’s leading firms into a shortfall of £41bn as of mid-July, according to a report from consultant Lane Clark & Peacock (LCP) who have compared all the companies in the FTSE 100 index. That compares with an aggregate surplus of £12bn a year ago.

Here’s how the maths works. Share price falls destroyed £33bn of asset values, while “new and severe market fears over rising inflation” tacked on another £50bn of liabilities – a “combined and unprecedented £83bn double whammy”, says LCP.

The only silver lining was a sharp rise in yields paid out on corporate bonds – i.e. on debt that’s been issued by companies.

Why’s that good news? Because there’s a rather less-than-exciting accounting standard used by actuaries called IAS19, which requires firms to work out their pension scheme liabilities using such yields. Under this measure, the consultants reckon that the total liabilities of the companies in the FTSE 100 index have been cut by some £40bn, as the income streams into the funds will now be higher than expected.

So at least something’s looking all right then. It looks like the amount that FTSE 100 companies will have to find to top up their schemes won’t be quite so bad after all.

Why the credit crunch could threaten your pension

This genius investor does dizzying levels of research to uncover...Half Price Shares!

While headlines about possible stamp duty reprieves, and the taxpayer being on the hook for yet more of the national disaster that is Northern Rock are vying for our attention, another much more worrying development has been creeping up on the outside.

Big company pension schemes have now gone under water again. In other words, deficits are back. And that could spark even more trouble ahead for beleaguered UK Plc – and maybe for your own pension, too.

Falling equity markets and rising inflation have joined forces to push the pension schemes of the UK’s leading firms into a shortfall of £41bn as of mid-July, according to a report from consultant Lane Clark & Peacock (LCP) who have compared all the companies in the FTSE 100 index. That compares with an aggregate surplus of £12bn a year ago.

Here’s how the maths works. Share price falls destroyed £33bn of asset values, while “new and severe market fears over rising inflation” tacked on another £50bn of liabilities – a “combined and unprecedented £83bn double whammy”, says LCP.

The only silver lining was a sharp rise in yields paid out on corporate bonds – i.e. on debt that’s been issued by companies.

Why’s that good news? Because there’s a rather less-than-exciting accounting standard used by actuaries called IAS19, which requires firms to work out their pension scheme liabilities using such yields. Under this measure, the consultants reckon that the total liabilities of the companies in the FTSE 100 index have been cut by some £40bn, as the income streams into the funds will now be higher than expected.

So at least something’s looking all right then. It looks like the amount that FTSE 100 companies will have to find to top up their schemes won’t be quite so bad after all.

Er, well… I wouldn’t be quite so sure.

Because that corporate bond yield has risen for a very good reason. It happens when more investors get twitchy about the ability of more and more firms to service their debts. Cash in British business balance sheets is drying up, as we’ve been pointing out for a while (see More bad news for British businesses for more). Now it seems that other commentators are latching onto the problem.

“Companies in the UK in particular are running into cash flow difficulties as the liquidity ratio – how much cash is held - has collapsed”, said David Owen at Dresdner Kleinwort last week. “And where liquidity goes, profits follow”.

Balance sheets will weaken “significantly” over the next 18 months in both the US and Europe, says Graham Secker of Morgan Stanley, but the weakest will be in Britain. And balance sheets are becoming a “key determinant” in stock market performance. Indeed since December last year they’ve been more important than either growth or value measures, confirms Tony Jackson in today’s FT. (By the way, you can find out one of the best ways to check on the health of a company’s balance sheet in this week’s issue of MoneyWeek, out on Friday – if you’re not a subscriber, click here for a free trial).

In other words, don’t be fooled by yesterday’s stock market bounce. Look out for more share price falls as companies report lower-than-expected profits, followed by analysts cutting their profit forecasts further. At the same time, more and more businesses will be reporting bigger cash flow problems.

That’s when rising corporate bond yields turn out to be a signal of bad news, not good. As shares fall, pension scheme deficits will be soon be climbing further. Businesses will have to devote ever more of their dwindling resources into topping up their schemes. And the risk of default, i.e. firms going bust, will start to threaten the capacity of some companies to rustle up enough cash even to meet their pension schemes’ shortfalls.

Could make Northern Rock look like a small pebble by comparison…

Edited August 6, 2008 by interestrateripoff

[Optimuswolf]

The market is still currently overblown, and yet they are in the red already...ffs, when the dust has settled on this they will be in the infrared. What also has to be taken into consideration is that over the last decade many companies have unilaterally lowered their pension benefits to the employees...so they are in the red on pensions that although technically were in the black, were already underfunded relative to the initial promises. My gfs current employer started her on a finally salary scheme, but then capped it at her then current salary which is the adjusted by an inflation measure and not the actual change in equivalent salaries, but her contributions rise in line with her salary (until it becomes completely uneconomic and she bails out of the scheme hence reducing their liability). This sort of actuarial/accountancy fiddles and a post 2003 boom in markets are what have been keeping pensions in the black. The point that a well managed scheme should oscillate between the red and black is completely trite...this would only be a reasonable argument if the benefits and other "rules" weren't continually shifting.

Surely this is just the sharing of risks between employer and employee. Conditions change to reflect shocks to the market. It costs the employer more and the individual gets less. Good news is that every hour that passes life expectancy goes up by something like 5 mins so their retirement will be longer.

This is what should be happening with public sector pensions but the unions haven't been taken on yet.

[patprimer74]

Someone on here must be involved in a pension fund, either as a manager or as a trustee?

At one time there was a guy on here who claimed he was a pensions genius. Turned out he knew Eff All about pensions but he may well come forward now and offer us his views. Wait for it!

p

[Thunderbird 900]

Pat the Prat, Are you talking about yourself again?

You are certainly no expert on pensions. In fact you are not an expert on anything.

I recommend anyone reading Mr Prat's posts should take exactly the opposite viewpoint and they would be halfway to the truth.

By the way... How is your mate Gordon and the Nu Labour project going? Not too well I hear. Strange how quiet you have become when attention turns to the incompetent idiots once known as the Labour Party.

Pat the Prat... Once a Moron, always a Moron.