Turning 65 in the U.K. used to mean mandatory retirement and a future of endless holiday. But in 2016 it has come to signify a very different cut-off: membership in the single most pro-Brexit age group in the June 23 European Union referendum.
About 60 percent of Britons 65 and older voted to leave the world’s largest trading bloc in the recent vote, the most of any age group, according to two separate exitpolls. The glaring irony is that senior citizens are also the most reliant on pensions, which face a worsening funding gap since the Brexit vote.
The combined deficits of all U.K. defined-benefit pension schemes, normally employer-sponsored and promising a specified monthly payment or benefit upon retirement, rose from 820 billion pounds ($1.1 trillion) to 900 billion pounds overnight following the referendum, according to pensions consultancy Hymans Robertson. Since then, it has grown further to a record 935 billion pounds as of July 1.
A sharp drop in U.K. government bond yields to record lows, and a similar decline in corporate bond yields, is largely to blame for the uptick in defined-benefit pension liabilities. That’s because fixed income represented 47.5 percent of total 2014 assets for corporate pensions funds, of which about three-quarters were issued by the U.K. government and/or sterling-denominated, according to the 2015 Investment Association Annual Survey.
And the slump may not be over yet. While the Bank of England held off on cutting rates or increasing asset purchases at its July 14 meeting, early signals point to serious pain ahead for the U.K. economy. If additional quantitative easing is ultimately required to offset growing uncertainty, this would suggest “that bond yields are going to fall, which makes pensions a lot more expensive to provide,” former pensions minister Ros Altmann told Bloomberg. “Deficits would be larger if gilt yields fall further.”
Beyond gilt yields, Altmann said that anything that damages the economy is also bad news for pensions. The country’s gross domestic product is now expected to grow by 1.5 percent this year and just 0.6 percent in 2017, according to a Bloomberg survey of economists conducted July 15-20. That’s down from 1.8 percent and 2.1 percent, respectively, before the Brexit vote.
A weaker economy means companies will be less able to afford extra contributions precisely when pension schemes face a growing funding gap, possibly threatening future payouts to pensioners and creating a vicious feedback cycle. “If companies have got to put even more into their pension schemes than they have previously while their business is weakening, then clearly their business will be further weakened,” Altmann said.
Bad news, in other words, for Brexit’s biggest supporters.