UK pensions caught in the “perfect storm”

The perfect storm
The perfect storm

A pensions expert has warned that people must be made aware their savings are in the “eye of the perfect storm” following the UK's decision to leave Europe.

Nigel Green, deVere Group’s founder and CEO, says that there are four key factors contributing to risks that may derail retirement plans; firstly, gilt yields have reduced considerably since the Brexit vote and this has driven up transfer values.

“This is good news for those wishing to take money out of the defined benefit scheme, but these larger pay-outs put extreme further pressure on the pension schemes themselves – many of which are already woefully underfunded. As more and more individuals seek to secure a transfer, the more likely it is that schemes will run into liquidity problems and could seek to freeze transfers altogether,” he explains.

Secondly, these falling gilt yields will further drive up pension deficits. “It was widely reported last week that the UK’s pension funding hole has hit a record high of £935 billion. This is likely to grow and will soon reach a trillion.

“The weight of these deficits brings into question the very survival of many company pension schemes and in order to survive they will need to make drastic changes to the terms of employees’ pension schemes.”

The third reason cited by Green is the downturn in the UK economy after the Brexit vote. “With some experts now forecasting a possible recession, it will become more and more difficult to fund pension schemes. Many companies will find the true cost of operating them increasingly prohibitive."

Lastly, the value of the assets that the schemes invest in and hold is likely to depreciate due to the economic downturn. “For instance there are real and justified concerns over a cooling property market and the banking and travel sectors, with companies across many different industries issuing profit warnings.”

Green concludes the Brexit has helped create “the worst of all worlds for pensions” and warns that savers must ensure they are properly diversified to mitigate the increasing threats to their retirement funds.