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Pension Conditions to Remain Tough in 2017

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Final-salary pension schemes will face a tough 2017, with many simply “treading water” next year, the Pension Protection Fund (PPF) warned.

Crises over the last year, including the BHS pension scandal and worries about steelworkers’ retirement deals, have thrown into sharp relief the challenges faced by the country’s 5,794 final-salary schemes. 

PPF, the sector’s lifeboat scheme, said the collective deficits of those schemes was £222 billion at the end of March, little changed from a year before.

That was before the economic fallout from June’s referendum on the UK’s EU membership, which impacted investments and the value of the pound.

And next year will provide little relief, with continued economic fluctuations following Brexit and increased scrutiny creating further problems for a sector barely recovered from last decade’s financial crisis.

Andrew McKinnon, chief financial officer for the PPF said: “When we look back at what progress schemes have made over the last decade, it appears that many schemes are just treading water.

“The current economic backdrop, as well as scrutiny faced by the entire industry, suggests conditions will remain tough in 2017.”

Experts say two major challenges face final-salary pension schemes. The first is that people are living longer, making pension schemes more expensive for companies.

The second is the uncertain economic outlook. Pension schemes rely on employee contributions being successfully invested to yield returns.

To combat these challenge, pension funds have tried to diversify by increasing investment outside the UK and to lower their risk by buying government bonds. But that means they’ve stopped investing in UK companies—with effects for those businesses.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “Pension schemes used to be owners of UK companies as well as being funded by them. Pensions being used to help finance the growth in British companies is becoming a thing of the past. Instead, our savings are either being lent to the government or invested abroad.”

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