Private sector defined benefit pension schemes, often referred to as ‘gold-plated’ final salary pension schemes, have reported a £626 billion reduction in value, according to recent data from the Office for National Statistics (ONS).
The ONS data indicates that the total value of these pension schemes decreased from over £2 trillion at the start of 2022 to less than £1.4 trillion by the end of March. This represents a near one-third reduction in their overall value.
A significant factor in this decline was the drop in gilt prices following the mini-Budget presented by former Prime Minister Liz Truss last year. Subsequent to this event, the Bank of England intervened with a £19 billion bailout directed at the pensions sector.
Historically, final salary pension schemes in the private sector were predominant investors in UK shares. Over time, these schemes transitioned towards Liability Driven Investment (LDI) strategies that focus on gilts, positioning them as low-risk investments. However, an issue arose when certain LDI funds engaged in the swift sale of assets, revealing previously undisclosed borrowings within the pension system.
Notably, despite the decrease in asset values, the ONS report highlights that the overall funding levels of these pension schemes have shown improvement. This is attributed to a faster decrease in the estimated obligations to pensioners, which are linked to gilt prices, relative to the decline in their assets.
Rudy Khaitan, managing partner, Senior Capital, said, “Chancellor Jeremy Hunt’s plan to consolidate workplace pension schemes and allocate up to £75bn of retirement funds for investment in high growth segments represents a strategic effort to stimulate the UK economy and generate better returns for pensioners. These reforms are expected to not only enhance retirement incomes by over £1,000 a year for typical earners but also drive substantial growth in the UK’s most promising companies.”
