Higher benefit payments than contributions in 3/4 of DB schemes

Three quarters (75 per cent) of UK defined benefit pension schemes are paying out higher benefit payments than they are receiving in contributions, Buck has revealed.

In its 2019 Mid-Market Review, Buck found that this figure had increased by 5 per cent year-on-year, as of 31 December 2019, with the average scheme having net annual outgoings of around £3m.

According to the review, the change reflects the “increasing maturity of schemes” and “an up-tick in pensions transfer activity”.

It also found that the average DB scheme accounting deficit was 7 per cent of assets, half of what it was two years ago, while scheme funding positions improved due to a one-year reduction in assumed life-expectancy at age 50.

The High Court ruling on GMP equalisation is expected to have a “modest” impact on the liabilities of pension schemes, with Buck estimating liability values to increase by an average of 0.8 per cent, or as much as 5 per cent in extreme cases.

Buck head of retirement consulting, Vishal Makkar, noted that it has been an “incredibly busy” year for the pensions industry.

He continued: “We’ve not only seen the issue of GMP equalisation coming to the forefront following the High Court ruling late last year, but with the government consulting on pension consolidation and more recently giving the go ahead to CDC schemes, we are entering an exciting and potentially transformative time for the pensions sector.

“However, among all this uncertainty, our review highlights improved financial positions for schemes over the past 12 months, with an increasing number of companies taking a more proactive approach to their long-term pensions strategy and broadening their investment allocation.”

Average annual employer contributions fell from £5m in 2017 to £4.2m in 2018, as companies look to manage their pension costs, while the prices of insurance products, such as buy-ins and buyouts, have declined due to reduced life expectancy trends and increased market competition.

Makker concluded: “As pension schemes face an uncertain future and the prospect of undertaking a large and complex GMP equalisation project, it’s vital for schemes to conduct a full strategy review of their pension arrangements to ensure they not only manage their costs and risk, but also provide better outcomes and financial security for pension scheme members.”

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