Press Releases

Pension liabilities outstrip UK GDP for the first time, says Hymans Robertson

15 Jun 2015 - Estimated reading time: 3 minutes

  • UK private sector Defined Benefit (DB) schemes collectively have liabilities of over £2 trillion – far in excess of the UK’s GDP of £1.8 trillion
  • This has been driven by ultra-low long term interest rates, stimulated by the likes of the EUR£1.1tn EU quantitative easing programme. This has pushed up liabilities much faster than modest rates of economic growth.
  • Time is running out for assets to deliver the returns needed to meet the mountain of pension payments that lie ahead
  • Investment time horizons shortening for mature DB schemes - they are increasingly paying out far more in benefits than they receive in contributions
  • This dynamic will only be heightened with the lure of freedom and choice leading to increased transfers out of DB schemes – we expect flows of £10bn from DB-DC per annum
  • As a result, there’s a pressing need for DB schemes to focus on income generating assets rather than simply chasing capital growth. This will help raise schemes’ resilience to poor capital returns - avoiding the any fire sale of assets at depressed prices to pay pensions
  • With prices high across most asset classes, and insurers keen to replace old world DC annuities with DB assets, now is also the ideal time to explore protection opportunities, which can enhance income whilst reducing and/or transferring risk

Figures released today from Hymans Robertson, the independent pensions, benefits and risk consultancy, show that despite companies attempting to shore up their pension schemes, paying £44 billion in contributions in the last three years, the financial cost of settling liabilities have reached a staggering level of over £2 trillion.

Commenting, Calum Cooper, partner at Hymans Robertson said:

For the first time in living memory, the liabilities of UK private sector DB pension schemes are now bigger than the UK economy. This has been driven by ultra-low interest rates, pushing up liabilities much faster than the modest rates of growth we’ve seen in UK GDP. However, pension scheme asset bases are also at their highest levels, following a period of strong performance across most asset classes. Over the last 5 years assets have grown by over 40% from around £900bn five years ago to around £1.3tn today. In the current environment, this leads to two pressing actions for both trustees and corporate sponsors of pension schemes. First, review your investment strategy with an eye to income requirements – from your assets, to pay pensions. As schemes mature, getting closer to the day when all promises are paid to scheme members, they increasingly pay out more in benefits than they receive in contributions. So without this focus, there is a very real risk of a downward spiral: cannibalising your capital.

Investment time horizons are clearly shortening, heightening the risk of investing in long-term growth assets. It’s important to make sure that cash is easily available when it’s needed - without a fire sale - to pay the pensions promised. It’s therefore vital that schemes move beyond a simple focus on growth (e.g. equities, diversified growth funds) and protection (e.g. LDI, buy-ins, longevity swaps) and begin to focus on the role of income generating assets (e.g. investment grade credit, debt) – in other words to shake off the one dimensional balance sheet focus and do some good old fashioned cashflow planning. This approach has the added benefit of minimising the risk that schemes will have to sell assets at depressed prices. This risk is all the greater due to record highs in asset levels due to bull runs across most markets. The second action is to look for opportunities to reduce risk, by looking at the protection strategies in place; and in some cases de-risk. For many DB pension schemes the ultimate end game is to undertake a full buy-out. While this ultimate transaction will be years off for many, a buy-in, which is a bulk annuity purchased by trustees as a well-honed protection asset, is an excellent and popular first step. Fortunately there is a clear opportunity right now for schemes, especially small and medium sized ones, to complete bulk annuity deals at highly competitive prices. This is because the life assurance sector has been hit hard by George Osborne’s ‘freedom and choice’ in pensions, which has caused sales of individual annuities to collapse. Insurers are looking to offset this lost income by entering the corporate pensions market. The conditions are good, but pension schemes will need to move quickly to take advantage of this short window of opportunity.

For further information or images, please contact:

David Chambers / Alexander Burley 
Hill + Knowlton / 020 7973 5925 / 02079735925

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