According to recent studies, the cost of running a pension scheme in Britain is set to double to £14bn a year over the next three years. Rising from an already staggering £7bn a year, businesses simply won’t be able to afford the charges. Acumen look at Brexit’s impact on pensions and the effect this will have on City profits, examining the relationship between final salary pensions and Brexit.
Brexit’s pension impact and city profits
According to JLT Employee Benefits, FTSE 100 firms that run defined benefit pensions, currently pay £7bn a year to fund their obligation and manage investments which, in turn offers workers a guaranteed income for life. However, at present, almost all of the running costs (£6.23bn) a year, is being used to plug funding shortfalls, which by March totalled an eyewatering £87bn. These figures suggest the crippling reality of falling pensions after Brexit.
Over the past three years, employer contributions for the average pension have doubled, from 26pc to 52pc of total staffing costs and due to interest rates and bond yields declining, the long-term liabilities are becoming somewhat of a burden.
Blue-chip companies face pension crisis
The burden of providing pensions after Brexit is becoming so huge that several large firms, including National Grid, BAE Systems and BT will face crisis in the coming year as they go through triennial reviews of their pension obligations, which could require massive cash injections. For those that can’t sustain a suitable cash flow, closing the scheme may be the only option. Many companies, including Royal Mail and Marks & Spencer have closed their benefit pensions due to the rising costs.
“It is difficult to conceive that such a prospect wouldn’t lead the schemes’ sponsors to take some kind of drastic action to mitigate those expenses, particularly as large pension deficits can have a detrimental impact on the company’s financial health and, therefore, its share price and dividend payments,” said Charles Cowling, director at JLT Employee Benefits.
Benefit pensions gained popularity in the 1960’s and 1970’s when companies began to supplement their workers’ state pension. However, gradually these pension schemes have become a millstone around corporate Britain. While 6,000 DB schemes are still operating, their overall liabilities are approaching £2 trillion, with around three-quarters being covered by assets, resulting in many firms switching to less generous pension schemes.
Acumen are leading financial advisors. If you require any advice regarding investments, retirement or pension options after Brexit, please contact us today by ringing 0151 520 4353 or 0800 170 7009. Alternatively, you can email email@example.com.