Share with your friends

Housing pensions after the EU referendum

Housing pensions after the EU referendum

Since the UK’s decision to leave the EU, asset values of pensions have improved but bond yields are now at an all-time low.

Steve Simkins


KPMG in the UK


Also on

blue pig

The market volatility following the UK’s decision to leave the EU has led to significant uncertainty for pension schemes. Since the vote, asset values of pensions have improved but bond yields have fallen through the floor and are now at an all-time low. This forcibly turns us to the next chapter in the pension story: the mounting pension obligations we now all face.

Pension scheme assets and liabilities, including those for housing associations, have reached unprecedented values. The trouble is that despite both rising, assets are not keeping up with the liabilities they are there to meet, exacerbating the funding shortfall and grabbing the press headlines. In fact, recent figures have shown that the funding shortfall for defined benefit pension trusts across the board has now topped £1 trillion – and that excludes the Local Government Pension Scheme (LGPS) which many participate in.

Government bond yields have dropped by 1 percent since the end of March 2016, but AA rated corporate bond yields have dropped even more and are 1.2 percent lower. While actuaries will debate what market yields to use to set discount rates, from an accounting perspective it is clear cut, as FRS 102 pension liabilities are linked to corporate bond prices.

If your accounts were reassessed as of late August 2016, your FRS 102 pensions liabilities (not with respect to Social Housing Pension Schemes) would have increased by over 20 percent - with the majority of this increase attributable to the period following the EU referendum.

In fact, the recent downgrading of many housing associations (from AA to A status) following the vote has sent ripples right across the wider pensions sector.

For those wondering why, housing association bonds tend to have higher yields and their removal from the AA constituency has resulted in the average yield of the remaining stocks falling. In fact, the fall has been around 0.1% to 0.2%, so this is the reason for the extra squeeze on FRS 102 pensions liabilities for all UK organisations.

Such a knock-on effect has naturally put housing associations in the spotlight, as pensions actuaries grapple with interpreting unprecedented market conditions and analysing the bond yield statistics. Whichever key pension measures most concern you and whatever discount rate you use, you should assess the impact of higher funding shortfalls on your business. That’s not to say a knee-jerk reaction is required, but if you decide to watch and wait, you should be ready to articulate your decision for waiting and to act quickly when the time is right.

There are two key steps to take to limit the growth in your pension liabilities. The first is to restrict defined benefit accrual and the second - at the extreme end of the spectrum – is to turn off the defined benefit pensions tap completely. With respect to the latter, it is important to note that with today’s market conditions, such a move could be beyond costly and would crystallise a debt that has never been higher – therein lies the dilemma.

This article first appeared as a blog on the Social Housing magazine website.  


Connect with us


Want to do business with KPMG?


loading image Request for proposal