The funding levels for UK private sector defined benefit (DB) schemes are a “stark read” for trustees and corporates alike, as private sector deficits triple in 15 years.

The warning, from consultancy Hymans Robertson, comes as the firm calculated liabilities could be as high as £2.1trn (€2.8trn) when measured on an insurance buyout basis.

Figures showed despite private sector firms putting £500bn into pension schemes since 2000, deficit levels had risen from £250bn to £900bn.

Additional figures from consultancy LCP showed that DB offerings in the UK’s largest 100 firms are slowly reducing their contributions to DB schemes, despite ballooning deficits.

Some reduction can be explained by schemes closing to future accrual, however, total liabilities for FTSE 100 companies still outweighed assets by £25bn at the end of July this year.

The UK’s largest companies put £12.4bn into pension schemes during 2014, down from £16.8bn.

LCP said despite falling contributions, the schemes still posed significant financial risks for their sponsoring companies, as it disclosed the 10 worse-affected firms combined had £350bn in liabilities and nearly £40bn in deficits.

The consultancy also said companies that paid in large contributions in recent years had begun reverting to normal, lower levels.

But, it conceded the current funding level not the worst seen in recent years, with deficit levels fluctuating between £10bn and £60bn in the last five years.

LCP partner Bob Scott said: “Strong investment returns, payment of deficit contributions and low levels of inflation has offset the impact of significant falls in bond yields, which have led to a material increase in reported liability values.

“[However] since January 2005, we estimate the total pension liability of FTSE 100 companies has almost doubled,” he added.

The overall private sector DB space, according to Hymans Robertson’s figures, were equally concerning.

Jon Hatchett, partner at the firm, said for any firm with a DB scheme the numbers were stark.

“Finance directors and shareholders will be scratching their heads wondering how this has come to pass,” he said.

Hymans’ £2.1trn figure was calculated by using the PPF’s latest update to the market on the state of private sector scheme funding – and increasing this by 44% to account for the cost of insuring liabilities via a buyout.

The lifeboat fund said the 6,057 schemes were £223.1bn underfunded on their ability to provide PPF-level benefits, otherwise known as s179.

According to the PPF, liabilities were at £1.52trn, and only covered by £1.26trn of assets.

Hatchett said schemes had been taking too much risk for far too long.

“Much of this is down to the three big positions taken since the turn of the millennium: positive positions in equities offset by negative ones on interest rates and longevity. Each has been incredibly costly.

“Rising longevity has added 10-15% to liabilities and falling interest rates more than 50% again, while equities have returned under half what schemes might have expected back in 2000,” Hatchett said.

He said trustees must resist the temptation to focus on investment growth, as this would not solve the issue.

“This situation requires a different approach: slower deficit reduction, taking no more risk than is needed and investing in assets that deliver income,” he added.

Topics