Figures released this week from independent pensions, benefits and risk consultancy Hymans Robertson, show that the financial cost of settling liabilities has reached £2tn.
Despite companies' attempts to shore up their pension schemes, paying GBP 44bn in contributions in the last three years, the financial cost of settling liabilities has overtaken the national GDP.
Calum Cooper, partner at Hymans Robertson said: "For the first time in living memory the liabilities of the UK private sector DB pension schemes are now bigger than the UK economy."
"This has been driven by ultra-low interest rates, pushing up liabilities faster than the modest rates of growth we've seen in UK GDP."
Pension scheme asset bases are also at their highest levels, however, following a period of strong performance across most asset classes, and assets have grown by more than 40 per cent in the last five years – from around GBP 900bn to GBP 1.3tn today.
Hymans Robertson says trustees and corporate sponsors of pension schemes must take two actions.
First, review their investment strategy with an eye to income requirements, from assets to pay pensions.
As schemes mature, getting close to the day when all promises are paid to scheme members, they increasingly pay out more in benefits than they receive in contributions.
Without this focus, the company says, there is a very real risk of a downward spiral and the cannibalisation of capital.
"Investment time horizons are clearly shortening, heightening the risk of investing in long-term growth assets so it's important to make sure that cash is easily available when it's needed - without a fire sale - to pay the pensions promised," said Cooper.
"It's therefore vital that schemes move beyond a simple focus on growth and begin to focus on the role of income generating assets - in other words to shake of the one dimensional balance sheet focus and do some good old fashioned cashflow planning," he said.
The second action is to look for opportunities to reduce risk by looking at the protection strategies in place and, in some cases, de-risk.
"For many DB schemes, the ultimate end game is to undertake a full buy-out," said Cooper.
"While this ultimate transaction will be years off for many, a buy-in, which is a bulk annuity purchased by trustees as a well-honed protection asset, is an excellent and popular first step."
Cooper urged pension schemes to move quickly, citing the current window of opportunity to buy annuity deals at competitive prices that has arisen due to the impact of the 'freedom and choice' approach taken by George Osbourne.
"There is a clear opportunity for schemes right now, especially small and medium sized ones, because insurers are looking to offset lost income by entering the corporate pensions market," he said.
First published 18.06.2015
Lindsay.sharman@wilmingtonplc.com
