The UK’s fractured defined benefit (DB) pensions sector is fighting for survival as it battles to plug funding gaps and address the growing gulf between younger and older workers, according to consultancy LCP.

In the firm’s 24th Accounting for Pensions survey of FTSE 100 company DB disclosures, LCP partner Bob Scott said the sector had “reached a tipping point”.

“The measures that companies have been taking, such as putting a cap on pay rises, reducing accrual rates, or increasing retirement ages, have nonetheless left them with a sizeable annual pensions bill,” Scott said.

According to the survey, FTSE 100 companies have pumped £150bn (€168bn) into their legacy DB schemes to go backwards over the past decade.

The findings come as the UK’s leading companies battle a prolonged low-interest rate environment and face up to a looming accounting rule change that could see billions piled onto corporate balance sheets.

Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, backed the LCP findings.

He said: “The evidence in the LCP survey supports the view that the current DB system isn’t fit for the future.”

Vidler warned: “The need to pay for past promises could divert employer resources away from the investment necessary to ensure their firms’ future.”

The PLSA has been campaigning for rule changes to allow small schemes to merge and potentially benefits from increased scale.

According to LCP, a UK sponsor must pay in 55% of annual salaries on average to fund a typical DB final salary scheme. This compares with the current minimum contribution of 3% into auto-enrolment defined contribution schemes.

Scott said: “As long as we have continued low interest rates and, indeed, even lower rates, DB sponsors will be under continued pressure to put more and more money into their schemes.

“This will have several effects. If money is going into legacy DB schemes, that is money that cannot be used for any other purpose.

The LCP funding snapshot broadly echoed the landscaped sketched out in KPMG’s 2016 Pensions Accounting Survey.

KPMG’s number crunchers reported in June that sponsors had made little progress towards plugging the aggregate DB funding gap over the past year.

LCP’s Scott went on to warn that the DB funding challenge added up to a huge intergenerational gap.

“Companies are now under pressure to provide benefits for people aged 40 and over at the same time as they are less able to fund decent benefits for younger members of their workforce,” he said. “This all comes against the backdrop of people saving too little for their retirement.”

Meanwhile, LCP also flagged up possible changes to the IFRIC 14 asset-ceiling guidance as a looming headache for DB sponsors as they battle their legacy funding hangover.

Scott said: “This is a serious issue. If the International Accounting Standards Board goes ahead with the amendments that they are suggesting, they will have a disproportionate impact in the UK compared to other jurisdictions.

“These changes could see companies add billions to their balance sheets. As many as two thirds of UK DB sponsors could be affected by these amendments.”

Topics