‘Gold-plated’ final salary pension schemes have lost £626 billion as new figures lay bare the full impact of the controversial investment strategies that caused near-meltdown this time last year.
Data from the Office for National Statistics shows that the value of private sector defined benefit plans – which pay a guaranteed pension based on a worker’s pre-retirement salary – fell almost a third from more than £2 trillion at the start of 2022 to less than £1.4 trillion at the end of March.
The fall accelerated after the price of gilts fell sharply in the wake of former Prime Minister Liz Truss’s mini-Budget a year ago. This prompted a £19 billion Bank of England bailout of the pensions sector.
Final salary pension schemes have mostly closed in the private sector after they became unaffordable for employers. Traditionally, they invested heavily in UK shares, but more recently they adopted controversial Liability Driven Investment (LDI) strategies based on gilts, which were meant to be low risk.
But this came unstuck when the LDI funds they used were forced into a fire-sale of assets after the crisis revealed hidden borrowing lurking in the pensions system.
Cliff edge: The value of private sector defined benefit plans fell almost a third from more than £2 trillion at the start of 2022 to less than £1.4 trillion at the end of March
‘£600 billion is a staggering sum,’ said Iain Clacher, pensions professor at Leeds University. ‘Nobody has been held accountable for the regime that got us here.’
Despite the losses, overall funding levels have improved as their estimated obligation to pensioners, which is linked to the price of gilts, has fallen faster than their assets.
‘One year on, pension funds are in general smaller in asset terms and their funding levels are mostly above 100 per cent,’ said Aoifinn Devitt, at wealth manager Moneta. But she warned that schemes continue to pile into gilts and stay away from shares, adding: ‘This may be a driver in the poor performance of the FTSE index so far this year.’
Rachael Healey at law firm RPC said lessons had been learnt from the LDI debacle, adding: ‘They are much better understood than a year ago. If a similar crisis were to happen again, pensions funds would be better equipped as most schemes should have bigger buffers and improved funding levels.’
The ONS found pension scheme holdings of equities had fallen in each of the past five quarters, contributing to the decline in assets.
The Government recently outlined plans to encourage pension funds to invest more in UK firms to boost sluggish economic growth.
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