American multinational financial services corporation, Morgan Stanley, has predicted that the U.K.’s Pension Protection Fund are likely to record their worst deficit ever.
Also read: Bitcoin is Not A Safe Haven and That’s OK
What is the Pension Protection Fund?
Set up in April 2005, the Pension Protection Fund (PPF) was established to pay a pension to members of eligible defined benefit pension schemes if the employer is insolvent and unable to pay the promised pension.
The PPF has been publishing their estimated funding position since July 2007 in the form of PPF 7800 Index, which reflects the aggregate funding position of the defined benefit schemes monitored by the PPF.
The defined benefit pension plans guarantee an employee an individual payout based on their years at work, salary and age as opposed to defined contribution schemes which no particular payout is promised. According to the Towers Watson Pension asset study for 2015, 71% of U.K. pension assets are in defined benefit schemes.
Worst Deficit Predicted
The latest official data released at the end of May showed a deficit of £294.6 billion or $392 billion, a 9% increase over the previous month of £270.2 billion. Total assets in the Fund were £1,295.8 billion whereas the total liabilities were £1,590.4 billion. Also, 4,864 schemes are in deficit and only 1,081 schemes in surplus.
In an interview with the Telegraph in March, Alan Rubenstein, chief executive of the PPF, admitted that the plans total assets equate to only 80 percent of the sum needed to pay out workers’ retirement incomes pledged. He said:
The situation is not getting better – it is becoming slowly worse […] It is like a slow speed train crash. There is a huge hole to fill.
Morgan Stanley analysts are predicting that the deficit will widen to around £388 billion by the end of June based on the changes in bond yields and share prices.
Brexit Exacerbates Deficit
The Brexit referendum has largely contributed to the widening of the deficit. While some investors have profited from the prospect of Britain leaving the European Union, others relying on long-term government bonds yields were left behind. Yields on government debt tumbled post-Brexit vote as investors sought safe-haven assets.
Le Roy van Zyl, senior consultant at HR consultancy Mercer, said in a statement:
Brexit may be positive for some schemes, for example, where the business outlook of the sponsor has improved significantly due to better export prospects. For others, their ability to continue to underwrite pension deficits and risk-taking may have deteriorated significantly.
Pensions funds need long-term assets that will deliver sufficient returns decades away. Currently, the strategic allocation of the PPF portfolio is 58% in Cash and Bonds so falling bond yields post-Brexit has negatively affected the Pension Fund significantly. Even though some of the investments have rallied since the referendum vote day, the deficit remains a big problem.
Bitcoin Could be the Long-Term Investment for UK Pension Fund
Some investors have called bitcoin a safe-haven after the Brexit vote while some are still skeptical. Investors increasingly recognize bitcoin as an asset class with low correlation to other asset classes. In a well-diversified portfolio, having bitcoin in the mix will help diversify the risk of investment. At press time, bitcoin price was $669.2 on Bitfinex, representing an over 50% increase since the beginning of the year.
Do you think U.K. Pension funds should invest in bitcoin? Share your thoughts in the comments section below!
Images courtesy of nyccbf.com, pensionfund.org