A rise in borrowing costs has wiped off more than £545bn from the value of defined benefit private sector pensions in nine months.
A rise in borrowing costs has wiped off more than £545bn from the value of defined benefit private sector pensions in nine months.
The market value of private sector defined benefit and hybrid pensions plunged from £1.8 trillion in December 2021 to just under £1.3 trillion at the end of September 2022 – a drop of 30pc, according to the Office for National Statistics.
The figure was exacerbated by the fallout of the mini-Budget in September, but the ONS's figures showed that losses were already climbing prior to this.
The losses pose a risk to hundreds of thousands of people with pensions in defined benefit schemes that are in deficit and are backed by financially vulnerable employers.
Steve Webb, former pensions minister and partner at consultancy LCP, said the losses are largely offset by an accompanying drop in the schemes’ liabilities.
But there is a looming problem for around 650 schemes, which are particularly vulnerable to a drop in their asset values.
Mr Webb said: “The financial position of pension schemes depends both on the value of their assets and also their liabilities. Rising interest rates have cut the cost of funding pensions, which means that most schemes are in a much better position that the fall in assets would seem to suggest.
“The schemes of most concern would be those where the sponsoring employer is weak or where assets had to be sold off quickly during the market turmoil of last autumn.”
There are around 5,100 defined benefit schemes in the UK. Of those which were in a deficit in 2022, 18pc had an employer that the Pensions Regulator judged to be “weak”.
Private sector DB pension schemes have taken a much larger hit than defined contribution schemes or public sector pensions (which fell by 9pc over the same period) because the way they have been regulated means they have much bigger exposure to movements in the gilts market.
It is primarily older workers and pensioners – a group that cannot take on large investment risk – who have these schemes. This means regulations therefore require them to move their funds away from volatile investments, such as equities, and into those which are more safe and stable – namely government bonds.
The drop in asset values has been driven primarily by the falling value of government bonds.
In December 2021, the Bank of England started raising interest rates and began a large sale of government bonds – a process known as quantitative tightening – to tackle soaring inflation.
The 10-year gilt yield, which rises when the value of bonds fall, jumped from 1.63pc at the end of March 2022 to 2.29pc at the end of June.
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