The Alice in Wonderland world of pension deficits.


FTSE grows, deficits up?

The first business day of the month is pension horror month where JLT announce new angles on the disastrous state of our Defined Benefit schemes. Deficits actually fell last month but JLT still managed to report a bad news story.

In a year when the FTSE grew by 14%, (18% with dividends reinvensted) our pension scheme deficits stood at £434bn at the end of December, up from £233bn 12 months earlier, (according to JLT Employee Benefits).

At 31 December 2016 Assets Liabilities Surplus / (Deficit) Funding Level
FTSE 100 Companies £596bn £765bn (£169bn) 78%
FTSE 350 Companies £675bn £866bn (£191bn) 78%
All UK Private Sector Pension Schemes £1,448bn £1,882bn (£434bn) 77%

FTSE100 companies alone have a combined deficit of £169bn on an IAS19 basis, a funding level of 78 per cent, down from 88 per cent a year ago. The response is predictable

“JLT says that while the deficit is below the record heights of over £500bn in the aftermath of the Brexit vote, the fact that shortfalls will be recorded in companies’ year-end reports means de-risking should become more widespread”.

The “pain” is spread fairly evenly as it was in 2015

At 31 December 2015 Assets Liabilities Surplus / (Deficit) Funding Level
FTSE 100 Companies £536bn £606bn (£70bn) 88%
FTSE 350 Companies £605bn £686bn (£81bn) 88%
All UK Private Sector Pension Schemes £1,225bn £1,458bn (£233bn) 84%

So what are we to conclude from this

JLT Employee Benefits director Charles Cowling says:

“This last month we have seen a slight deterioration in deficits but they are still below the record heights of over £500 billion recorded at the end of August….. However, pension scheme deficits are still significantly larger than the levels at the start of the year and there appears to be no relief in sight for companies with large pension schemes.

“Now we have reached the all-important year-end for many companies, we are going to see many companies’ accounts showing a marked deterioration in their year-end pension numbers. There will be instances where the pension scheme will represent a serious threat to the company’s balance sheet and, in some cases, the company’s ability to pay dividends.

“We can hope that pension schemes will take further steps to manage both assets and liabilities and to reduce pension risks down to an affordable level. The tools now exist for an effective de-risking of pension assets and liabilities, which, whilst not promising a silver bullet, do mean that pension problems can be managed and solved in time. Maybe 2017 will be the year when formal end-game de-risking strategies are at last embraced by the majority of pension schemes.”

The language is so revealing. “A deterioration in deficits” should mean that the deficits are getting worse. In the context of this release it actually means that deficits are getting better- though this is clearly “worse” if your business is selling bad news.

We learn that there is “no end in sight for companies with large pension schemes”, though the numbers suggest that the smaller companies not in the FTSE indices are lagging the large ones. There is no explanation why the large pension schemes are having it bad (other than its the largest strongest companies who can most afford the de-risking measures suggested in a moment).

Reducing “pension risks to an affordable level” means pouring money into the scheme to pay for more overvalued gilts (and their derivatives) and for consultancy fees needed to manage the complex de-risking programs. The medicine is apparently worth the cure but it seems to have done little to improve deficits so far. The “affordable level” is presumably the point where the balance sheet and the dividend payments are inoculated against pension shock.  guess that if you inject enough drugs into a patient, he will become comatose, but this presupposes the patient was ill in the first place.

The FAB index suggests a general misdiagnosis.


In the Alice in Wonderland world of pension scheme accounting ( IAS 19 is an accounting measure), funding ratio tracked by JLT is that of the purple line (shown here when funding with reference to a gilts+ discount rate was at its worst).

The blue line represents the funding position of the aggregate of UK schemes on a best estimate basis, where the discounting takes into account the likely performance of the assets the scheme is invested into.

The argument is that de-risking schemes into a gilt orientated investment strategy will make the patient stronger. This is similar to the medieval practice of applying leeches to decontaminate the blood. It certainly hurts, but it doesn’t make the patient better. The problem that leeches “solved in time” was existential, the leeches got fat and the patient ceased to exist.

So we issue a severe health warning over engagement with “formal end-game de-risking strategies” If you are looking for an expensive pre-pack for your company’s pension problem – “embrace” this line of investment consultancy; if you are looking for a way to pay your pensions over time, take comfort in the blue line and shop  around!

Malice in blunderland

“The sad fact is we are highly likely to see a lot of scheme closures in the coming months and years, unless the cost of funding defined benefit pensions can be made more affordable. One wonders whether the public sector defined benefit pension scheme will also come under similar pressures?”

The cost of managing a scheme by investing in gilts is currently huge. While equities give a steady 4-5% yield, real gilt yields remain negative. As we have seen in recent blogs, gilt based schemes are a prey for opportunistic transferors cherry-picking their CETVs and adding to the fundamental capacity of the scheme to meet its obligations.

The public sector is now apparently within the marketing plan! Even though its schemes are either unfunded or still open to future accrual. Goodness only knows what the intended tilt to gilts that would mean to their yields were their a further shift to fixed interest in the private sector – let alone the public sector!

This myopic fascination with de-risking is having a bad effect on Britain. Companies are starving themselves with cash to meet the demands of the de-risking programs they have masochistically embarked upon, the country is being starved of long-term investment as money is being switched from equities and infrastructure to gilts and corporate bonds.

I know the folks at JLT, they are not malicious, they do not intend to do harm any more than they enjoy seeing “deterioration”. But their blundering application  of leeches to healthy patients are deteriorating confidence in pensions;  they will be considered more than malicious when if come to answer to the Competition and Markets authority.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to The Alice in Wonderland world of pension deficits.

  1. By stating the bleeding obvious ( to those that want to see) you draw much needed attention to an alchemy that simply does great damage based upon nothing but flawed teaching. Gilts are always safe and a haven of security became an outmoded mantra years ago.
    Gilts have seldom if ever constituted a poorer investment for growth.

  2. ancientllm says:

    It is bizarre, Henry, that a firm such as JLT should be so conned by the accounting profession. I seem to recall that after John Ralfe had moved the Boots scheme into gilts and then left, Boots had to pour a huge sum in to mend the hole in the fence. I cannot see why anyone other than an accountant would think that IAS19 should be allowed anywhere near a Pension Fund. I guess that one of the reasons why I have never been a sycophant of Steve Webb is that in his entire time as Pensions Minister it seems he never even considered scrapping IAS19, whereas it should have been the first thing he did when he took office. I worry for the continued existence of pensions and the associated industry if it continues to be “controlled” by people who only interest is making the most money possible out of potential pensioners and their employers rather than providing pensions.

    Not a good start to the New Year!



  3. henry tapper says:

    Read the next “FABI” blog for an alternative position! And if you don’t think Government are listening, read my blog of December 22nd!

    JLT has a commercial agenda, I don’t blame it for following it – but we must recognise it for what it is.

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