As the pension schemes of top companies turn the corner and start to edge back into the black, a new worry is gripping financial experts.
Deficits have dropped from £75 billion at the start of 2017 to £35 billion in January 2018, with further falls following to take the figure down to nearer £10 billion.
Sustainability is the new concern – a fear that many pension schemes are not equipped to meet the demands of increasing numbers of savers moving into retirement.
More than 10 million new retirees are expected to retire within a decade.
Not only will they want the money they have saved, but they are living longer.
Longevity issues
Increasing longevity is a problem for pensions because as members live longer, the scheme must pay out more in benefits.
However, research from pension consultancy Wills Towers Watson suggests longevity has reached a peak and is starting to decrease to 87.6 years for men and 89.4 years for women if they reached 65 in 2017.
“After a significant increase in defined benefit (DB) pension scheme deficits in 2016, funding levels were relatively stable throughout 2017, and by the end of the year the aggregate deficit of FTSE 350 companies had actually fallen by around £40 billion,” says the research report.
“This improvement in the position is in part due to the effect of companies adopting the latest mortality projections and making changes in the discount rate models they use to value their pension liabilities.”
Contributions increase
Funding levels were boosted by companies stepping up cash contributions into their pensions.
In 2015, funding to reduce deficits was £3.7 billion, increasing to £4.5 billion in 2016 and £5.8 billion in 2017.
“Companies have also increased their relative contributions to schemes over the past three years. In 2015 around £14 billion was contributed, with the largest part consisting of the cost of accrual stood at £4.9 billion, followed by payments into defined contribution pensions at £4.8 billion and deficit reduction contributions of £3.7 billion,” says the report.
“However, by 2017 deficit reduction contributions almost doubled to £5.8 billion, while cost of accrual saw a slight decline to £4.6 billion, with DC contributions climbing by £400 million.”
