Investment - Articles - JLT monthly funding update for UK DB pension schemes

 Charles Cowling, Director, JLT Employee Benefits, comments: “This last month has seen a very slight easing of deficits from the record heights of over £500 billion reported at the end of August. There seems to be no relief in sight, however, for companies with large pension schemes and their pressed trustees. According to market prices, returns on gilts are expected to remain below 1.5% per annum for the next 20 years. Moreover, recent comments from the Bank of England have suggested that the next interest rate change could just as easily be downwards, making matters even more problematic for pension schemes.

 “It is a very difficult environment in which companies have to negotiate with trustees on the funding of their pension schemes. Pension schemes with an actuarial valuation now are going to find it challenging to come up with a funding plan that will keep all parties happy. Inevitably there are going to be demands for some massive hikes in contributions and the question has to be asked, can UK plc afford its own pension liabilities?

 “Government and regulators are facing some troublesome choices: cutting pension benefits to members or reducing guarantees attached to benefits, which in a bad scenario such as an insolvency could mean members losing benefits, is going to be very unpopular with voters. But forcing companies to guarantee pension promises made many years ago when market conditions were different is going to result in dividends being scrapped, share prices falling, and worse still, companies going bust. Changing how pension liabilities are valued, as some have demanded, does nothing to help the problem – it just sweeps it under the carpet for someone else to manage.”