The funding position of private sector defined benefit (DB) pension schemes has deteriorated in the past year and employers can expect little help from the government’s recent green paper, JLT Employee Benefits says.
These schemes had a combined £270bn black hole at the end of February, compared to a £109bn deficit 12 months ago. This has seen funding fall to 85% of liabilities from 92% at the end of February 2016.
Quantitative easing (QE) and interest rates cut to historically low levels have not helped. However, JLT reports that deficits, which it bases on the corporate bond-focused IAS 19 accounting standard, stabilised in February, due to what JLT director Charles Cowling described as a “quiet month for markets”.
Schemes for employees of FTSE 100 companies have been worst hit in the past year. Their funding shortfall increased by £68bn to £94bn during this period. For FTSE 350 schemes as a whole, the deficit increased by £80bn to £111bn in 12 months.
This comes at a time when listed companies in London found £16.6bn to pay dividends for the final three months of 2016, a fourth quarter record.
Cowling said DB pension obligations are causing distress for employers and the government’s recent green paper is not helping.
“Whilst accepting that the system may not be perfect, the government, in its recently published green paper on Security and Sustainability in Defined Benefit Pension Schemes, does not seem to believe there is a significant structural problem with the funding and regulation of DB schemes,” he added.
“Their view is that deficits will shrink for most schemes if employers continue to pay into them and that the evidence does not support the perspective that promised pensions are unaffordable for most employers. Indeed, any appetite for change seems to be focused around giving new powers to The Pensions Regulator (TPR) in relation to corporate transactions.”
Cowling points out that DB pension schemes do not operate in a vacuum. “For many, their ability to deliver promised benefits if the employer gets into difficulty, is questionable. Furthermore, for those employers with large DB pension schemes, the economic cost of guaranteeing escalating pension liabilities at a time of extraordinary market conditions, is becoming a burden that their balance sheets are increasingly less able to bear.
“We hope that this Green Paper is not a signal that the government intends to ‘kick the can down the road’ on DB pensions for another 20 (or even 50) years – there is too much at stake,” he added. “Now more than ever all stakeholders, including employers, trustees, members, policy makers and the pensions industry, need to act together and explore the options for achieving a lasting DB settlement.”
