We hear  a lot about company pensions and their “shortfalls”. So what’s it all about?  Many company pension schemes, worried about the UK’s economic volatility decided to invest a larger proportion of their pension funds into bonds. Unfortunately, the Bank of England then decided to try and kick-start the economy by producing lots of new money through Quantitative Easing. That, in turn created a sharp drop in bond yields which forced  the pension funds to allocate even more of their investments to bonds in order to try and make up the shortfall in their liabilities. Equity market returns are , on the face of it attractive – but they can also be dangerous by virtue of their unpredictability, especially as many fund managers are expecting a downward “adjustment”.  To give you an idea of the scale of the problem, several FTSE100 companies have pension commitments GREATER than the value of their funds. Pension liabilities (money which companies need and will be needing to pay pensions to their retired and retiring ex-employees} are approaching £60 billion.  Bond yields, as well increased life expectancy of a company’s retirees are now becoming a major problem. The upshot is that companies will somehow have to make up the shortfall. THAT is why they are reluctant to hire people or invest in their businesses. They cannot afford it!

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