Pension deficits 'are hampering business investment'

The majority of senior finance executives at the UK’s largest companies expect their defined benefit pension scheme to hamper their business’s financial performance over the next three years, according to research published today.

A survey of over 100 companies carried out by Mercer and the Institute of Chartered Accountants in England and Wales found that 57% expected their scheme to have either a 'very negative' or 'somewhat negative' impact on their finances.

Low gilt yields and the cost of reducing scheme deficits were among the top worries for executives trying to manage the risk of their DB pension scheme, while investment strategy and deficit volatility were also highlighted as major concerns.

In particular, Living with defined benefit pension risk found that the Bank of England's quantitative easing programme was seen as having a 'significant and negative' impact on schemes. Respondents said that the practice of calculating liabilities in line with the long-term yield on government bonds meant liabilities and deficits had been increased by the negative impact QE had had on gilt yields.

Firms said that while they wanted to de-risk, they did not want to at current gilt yields and as a result many were biding their time until this situation improved.

Ali Tayyebi, senior partner at Mercer, said: 'Our research reveals a paradox. While the negative impact of DB pension scheme deficits is clear, companies face a quandary. The current environment which emphasises the need for a clear risk management strategy, is also the one in which it is most difficult to implement de-risking strategies.

'Companies are concerned about being locked into low interest rates, and the scope to increase cash contributions to their pension schemes in the current environment is limited.'

The research did, however, find that firms were keen to take action to address their pension risk, with 80% of respondents either having already put in place or planning to put in place a journey plan mapping out triggers for de-risking.

A third (34%) of respondents said they planned to invest in assets that more closely match their liabilities over the next three years, while almost one quarter (22%) aim to offer enhanced transfer values to incentivise existing members to transfer out of their scheme.