Who Blew Up Britain’s Pension Funds?

Britain’s newest parlor game is assigning blame for the country’s exploding pension funds. Wobbly balance sheets at some of the United Kingdom’s largest defined-benefit pension managers have triggered a mini financial panic with ripples abroad. The causes of this crisis are worth relating because they may be coming to a financial instrument near you.

Pensions in particular are blowing up because the funds are highly sensitive to changes in interest rates as they seek to balance assets and liabilities over long time horizons. And the explosion is happening in Britain because defined-benefit pension plans—the most interest-sensitive—remain more common in the U.K. than in the U.S. As of 2019 about 35% of Britons enrolled in a private pension were in a defined-benefit scheme, while the U.S. proportion had fallen to 23%.