The Downfall of UK Pension Funds

 

Retirement not as sound as once before

The UK has seen a huge decline in pension figures.

Pension vs Pension Liability

A pension is an amount of money that a business or government uses to make payments to its retirees.

The company usually doesn’t pay pension benefits directly, rather it buys an annuity which converts a fixed amount of money into a lifetime of annual payments for the retiree.  However, investing in it can be tricky.  The amount to which a guarantee basis its foundation on changes over the years.

When the stock market takes a decline, the investment can too, which means less money for all concerned creating a pension liability.  A pension liability is the difference of the amount that’s due and the amount of money that is actually available.  The liability happens in a traditional DB scheme or a Defined Benefit scheme such as a matching fund that guarantees a certain amount of retirement income.

When the government or other agencies use the money that is for pensions for other reasons, and don’t replace the funds, this could create a pension deficit or liability.  Another way in which a deficiency may occur is to have thousands of people retire or laid off at the same time.

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Pensions in the UK

For some time now, the UK pension fund has been under the scope.  The pension fund operates on a collection of earnings or component of earnings.  It’s very much a part of the UK’s economic position and lately, its disruption.  It’s important to Russia and other sizable European markets mainly due to the returns of the UK pension fund.  The Brits seemed to have doubled their assets, unlike the UK as shown in the survey completed (2014) by the British Private Equity and Venture Capital Association or the BVCA.  It was twice as much returned by the FTSE All Share as well, based on the previous years.

Over the course of a five year study, the figures were not as sensational.  UK pension funds were at 9.4%, while for the FTSE it stood at 8.7%.  This was during the conflicting financial crisis and the volatile markets challenged many companies to make profits. People in power were demanding that everyone invest in low yielding bonds and furthermore, need to match liabilities.  As a result, this action decreased the return of other assets.  However, an investment in equities would provide a better source of profitable returns.

The Disruption

Poor investments naturally equate a loss for the holder.  A wise investor knows to follow the path and direction of the market no matter what his or her holdings are.  The FTSE was down by 9% as of 2000.  That’s a drop of 0.7% yearly.  It was suspected that most of the pensions in the private sector would be stalled or even eliminated within a few years.

When the government taxed pension plans and implemented a transparency policy in their accounting practices, it seemed to have declined the UK’s financial outlook.  The percentage of their assets which froze increased greatly.  In 1998, it went from 35% to 70% in 2006, according to Munnell and Soto (2007).

Some private pensions were declined in the UK such as the DB pension program, primarily due to its previous state.  New employees typically did not take part in DB’s pension plan in lieu of its reputation.  The decline was huge.  Those that took part in their plan plummeted from 67% to 11 %.   This prompted employers to rethink their policies or pension schemes and look to make some much needed adjustments.

The UK has seen its ups and downs when it comes to pension funds.  Since 2000, it has paid out £500 billion.  On the other hand, it has seen a shortage in the amount of £900 billion.  Strict regulations can be held accountable for this deficit in its petition to match liabilities.

Deficiency in UK’s Pension Funds

In 2010 an explosion occurred along the Gulf Coast (MS and LA) which left 11 people dead.  The results of that explosion were tremendous and costly.   The oil spill was disastrous for many in the UK as they were heavily invested in the FTSE 100 company.  This spill took its toll as BP’s shares dropped by one third.  This was significant to UK equity investments.

As of this date, it’s not known exactly how much the cost of spill will have affected the UK’s pension totally.  Nonetheless, the expectation is that it will be close to a billion pounds.  BP anticipated paying for clean up, fines and compensation for those who were stricken by the spill.  These factors all have a role in how the UK collects their fair share of the dividends.

The bad times doesn’t necessitate a pullout.  Although, situations may not look bright, remember, not every stock will fall simultaneously and the market will take a turn for the better.   Many of the employers will want to cash in on progressive pension plans and rebuild what has been lost.  Some investors will put substantially more into one fund than the other, removing some of the risk of losing all of their assets.

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