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The Actuary The magazine of the Institute & Faculty of Actuaries

Trustees ‘will seek over £100bn to plug deficit gap’

Pension fund trustees could seek more than £100bn in deficit reduction payments from scheme sponsors over the next three years as they try to address the risk of members receiving less than their promised benefits.


According to a survey of 170 pension fund trustees published today by Pension Corporation, 46% expect funding levels to be worse than at the last valuation when this year’s round of triennial valuations is carried out.

This is despite trustees having received more than £80bn in deficit reduction payments over the past three years. Employer contributions have mainly been used to compensate for underperformance of assets against liabilities, the consultancy said, leaving schemes some £110bn behind their deficit reduction targets.

Almost four in 10 (37%) of trustees now expect to negotiate an increase in sponsor contributions over the next three years, with 20% of those surveyed seeking an increase in payments of over 10%. Deficit reduction payments over the next three years could amount to 13% of UK corporate cash holdings, Pension Corporation said.

The survey also found that, while 29% of schemes expect to see lower asset returns in the future, more than half of those surveyed (53%) had taken no steps to reduce the major liability risks –longevity, inflation and investment risk exposure.

According to Pension Corporation, a 1% rise in long-term inflation expectations could increase liabilities by around 20%.

David Collinson, co-head of business origination at the consultancy, said the situation meant that a ‘significant minority’ of members of defined benefit schemes could lose out on some of the benefits they expected to receive, despite the money ploughed into plans by sponsors.

‘What many in the pension system fail to realise – or worse are afraid to say – is that those members who hope to start drawing their pension in the next few years or decades will not necessarily be getting what they were promised today,’ he said.

 ‘Excessive costs caused by too much misguided legislation, poor matching of investments and liabilities and the overall economic environment have combined to create a perfect storm which will very likely wash away benefits from a significant minority of members of defined benefit pension funds.’

He added: ‘Hard pressed sponsors may well despair that the huge amounts of money they have put into pension plans seems to be eaten up by continued asset and liability underperformance.’

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