Its The end of the beginning?
report also found that, with liabilities rising faster than assets, one in six pension schemes are unlikely to be able to fulfil their promises in full, as life expectancy continues to rise and interest rates fall.
This has raised fears about the sustainability of DB schemes, with millions still expected to be receiving a pension in the latter half of this century, despite only 13% of schemes being currently open to new members.
ILC-UK head of economics, Ben Franklin, said: “Adverse economic conditions and an unprecedented demographic shift towards an ageing society has put the sustainability of private sector DB schemes in doubt.
“Despite schemes being closed to new members, increased life spans and the persistence of a low interest rate environment means the issues surrounding private DB schemes will not abate any time soon.
“Our analysis suggests that plugging pension deficits has acted as an opportunity cost – supporting the pensions of retirees at the cost of investing in the current workforce.
“We call on government, regulators and industry to devise solutions that move away from simply securing full member benefits, and towards those that build in a recognition for the wider societal and economic challenges associated with continued DB pension deficits.”
Average real returns on government bonds have been falling consistently since the 1990s according to the report, and fell from 4.1% between 1989 and 2007 to 0.45% between 2008 and 2016.
Some commentators maintain bond returns will increase, but Franklin said that hoping for interest rates to return to normal is “futile”, with 80.6% of DB schemes found to be in a deficit in October last year, and 10 to 17% of these at serious risk of default.
The proportion of DB schemes in a deficit over the last 10 years is shown below: