UK companies are paying too much to their DB schemes

Our research suggests that companies are overpaying into defined benefit pension schemes, with funding targets more than 10% higher than necessary.  Across corporate UK, the level of overpayments could total at least £5bn a year.

The problem is that outmoded ways of calculating the contributions needed to cover future pension payouts do not reflect the way pension scheme assets are invested and the longer term gains expected. This means that companies are paying more cash into their schemes than is currently needed. Pension scheme funding targets typically assume that funds held for retired scheme members will be funded by lower risk investments such as bonds.  With the proportion of pensioners increasing, funding requirements are in turn being based on a greater proportion of low growth assets which, for many schemes, does not reflect the actual investments the scheme holds - the reality for most schemes is a more gradual transition of investments, particularly now life expectancies have increased. The result of this is that funding targets are being based on overly conservative expectations  of investment growth, and the effect is becoming more pronounced as the population ages.

Alternative approaches which better reflect actual investment strategies and could ultimately result in lower company spend on deficit repayments are available. The attached 3 minute webcast contains more detail on the problems with the current approach as well as the advantages of looking at alternatives and how to go about this.

For more information please contact Raj Mody, Jeremy May, Chris Venables or Alison Fleming.