Senior citizens were the most ardent supporters of Britain’s decision to leave the European Union (EU), but that could soon change due to the worsening pension funding gap that the vote has created.
The combined deficits all of UK pension programs rose from £820 billion to £900 billion overnight following the June 23 referendum. By July 1, the deficit had grown to a record £935 billion.
Patrick Bloomfield, partner at Hymans Robertson, had the following to say about Britain’s growing pension hole following the Brexit vote:
“The gyrations in UK pension deficits are eye-watering. But one of the biggest factors that will determine whether or not pensions are paid to scheme members in full will be the health of the sponsoring company post Brexit. This should be a primary consideration when making funding decisions for [Defined Benefit] schemes.
Bloomfield indicated that the “consensus view” among experts is that the short-term economic effects of Brexit will be “predominantly negative.”[1]
Of course, Bloomfield is referring to the fact that the vast majority of experts are forecasting a sharp slowdown in the British economy over the short term, with many others predicting a recession. Even long-term, analysts appear to be on the same page that Britain’s economic prospects have diminished following the Brexit vote. Estimates from CEP, Her Majesty’s Treasury, the National Institute of Economic and Social Research (NIESR) and Oxford Economics, among others, suggest that Brexit could reduce British GDP by up to 7.9% by 2030.[2]
A large decline in UK government bond yields and a similar drop in corporate bond yields is largely to blame for the rise in defined pension liabilities. That about 60% of Britons 65 and older voted to leave the EU is rather ironic, given that this demographic is the most likely to rely on pensions.[3]
The Bank of England (BOE) is expected to lower interest rates in August to counteract further downside risks to the British economy. The BOE held off on lowering rates at its July 14 meeting, but indicated that new measures could be taken as early as August.[4]
The Bank has held its benchmark interest rate at 0.5% since 2009.
Analysts warn that the pension gap is likely to grow bigger should the economy continue to deteriorate as expected by the great majority of market analysts. If the Bank does in fact lower interest rates or introduce new rounds of quantitative easing, pensioners can expect an even bigger fall in bond yields, thereby making pensions more expensive to provide.
Britain’s gross domestic product is expected to grow by just 1.5% this year and only 0.6% in 2017, according to a median estimate of economists polled by Bloomberg. That’s down sharply from the previous forecast of 1.8% and 2.1%, respectively.[5]
The International Monetary Fund (IMF) is also dovish, but slightly more optimistic. The international lending institution recently downgraded its outlook on UK growth to 1.7% in 2016 and 1.3% in 2017. The 2017 downgrade amounted to 0.9 percentage point.
The IMF also lowered its outlook on global growth this year and next, citing heighted risks emanating from Brexit.
“With “Brexit” still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting,” the IMF said in the July edition of its World Economic Outlook report.
[1] Patrick Bloomfield (July 1, 2016). “UK pension deficit hits record level of £935bn on Monday.” Hymans Robertson.
[2] Oscar Williams-Grut (June 17, 2016). “One chart shows you all the main economic forecasts for Britain in the event of a Brexit.” Business Insider UK.
[3] Andre Tartar and Jill Ward (July 26, 2016). “Brexit’s Biggest Fans Face New 115 Billion-Pound Pension Hole.” Bloomberg.
[4] Hazel Sheffield (July 14, 2016). “Bank of England keeps interest rates on hold at 0.5% – as it happened.” The Independent.
[5] Andre Tartar and Jill Ward (July 26, 2016). “Brexit’s Biggest Fans Face New 115 Billion-Pound Pension Hole.” Bloomberg.
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