Over the past 15 years, companies have injected £500bn into pensions—only to see deficits treble, according to pensions consultancy Hymans Robertson.
The firm said that deficit levels have risen from £250bn to £900bn. It calculated that liabilities could be as high as £2.1trn (€2.8trn) when measured on an insurance buyout basis.
Hymans Robertson also said the positions taken by most schemes in equities combined with low interest rates and more people living longer all contributed to the surge in liabilities.
Partner Jon Hatchett said: “Each has been incredibly costly. Rising longevity has added 10–15% to liabilities and falling interest rates more than 50% again, while equities have returned under half what schemes might have expected back in 2000.”
Escalating liabilities had sobering implications for companies, he said.
“Finance directors and shareholders will be scratching their heads wondering how this has come to pass,” added Hatchett. “For too long schemes have been taking more risks than they need to. The result is a large and expanding bill seemingly stretching forever into the future.” Hymans said sponsors and trustees had a fine line to tread in managing spiralling deficits, with total pension liabilities in the private sector higher than the country’s GDP at over £2trn.
Hatchett continued: “The main challenge for schemes now is paying out pensions to retiring members for decades to come. The situation requires a different approach: slower deficit reduction, taking no more risk than is needed and investing in assets that deliver the income needed to pay today and tomorrow’s pensioners. This is a long-term game.
“Go too far though and over-caution will get the better of schemes when the economy normalises. Schemes are sitting on a record £1.3trn of assets at present. Investing to protect this—and its ability to pay retirees’ pensions—is critical, but an overly conservative approach will cause damage too.”