Britain’s final salary pension funds have slashed their ownership of stock-market listed companies to just 7% of their total holdings following a huge shift in recent years to overseas stock markets and government bonds.
The move away from owning UK stocks emphasises how dependent Britain’s estimated 13.5 million past and present final salary scheme members have become on returns from shares in US, continental and emerging market companies to generate a retirement income.
The rapidly ageing membership of Britain’s guaranteed, defined benefit pension schemes has also forced a huge shift into government bonds as scheme trustees attempt to reduce the risk of their fund becoming insolvent.
According to the annual pension fund health check by the Pension Protection Fund, the 5,794 UK defined benefit pension schemes faced a £780bn deficit at the end of March 2016, little changed on the year before.
A combination of falling global share prices and a slump in the interest paid on government bonds offset a flood of special contributions by employers that cost £10.5bn in the first half of 2016.
The number of active scheme members fell below 1.5 million for the first time, the PPF said, increasing the number of deferred members with a frozen guaranteed payout.
German car giant BMW became the latest firm to propose shutting its final-salary pension schemes when it said in September that it would shift the 5,000 staff at its plants in the UK over to its less generous defined-contribution scheme.
Tom McPhail, head of retirement policy at the stockbroker Hargreaves Lansdown, said the £780bn deficit was “staggering” and revealed the uphill task faced by employers in meeting their obligations to employees.
He said the change in the composition of investments also illustrated how the relationship between employers and the UK pension system had changed significantly in the past 10 years.
“Pension schemes used to be owners of UK companies as well as being funded by them. Now, the bulk of scheme assets are invested overseas or in bonds. What’s more, as schemes mature, they will increasingly become net sellers of assets.
“Pensions being used to help finance the growth in British companies is becoming a thing of the past; instead our savings are either being lent to the government or invested abroad.”
The PPF, which was set up as an industry-backed lifeboat fund for crashed schemes, said the proportion of overseas-quoted shares in equity holdings increased from 65.4% to 68.6%. The share of bonds in scheme portfolios rose from 47.7% to 51.3%.
Andrew McKinnon, the PPF’s chief financial officer, said: “While scheme funding remained largely stable in the year to March, there have been large swings in funding since June.
“When we look back at what progress schemes have made over the last decade it appears that many schemes are just treading water. The average recovery plan length, at around eight years, has barely improved, which brings home the challenge we now face.
“The current economic backdrop, as well as scrutiny faced by the entire industry, suggests conditions will remain tough in 2017.”