Hefty company contributions to DB pensions failing to dent deficits

August, 2016 Print

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The UK’s defined benefit pension plans have swallowed £75 billion in company cash contributions since 2010 according to consultant Mercer.

Mercer estimated that despite £15 billion a year being contributed by pension schemes of FTSE 350 companies, the size of defined benefit deficits has risen by 50%, or £34 billion, over the last five years. In fact, Mercer estimated that the funding level of the DB plans fell from 88% at the end of 2010 to 87% at the end of May 2016. Mercer senior partner, Adrian Hartshorn, commented: “Despite many billions of pounds of company contributions, DB pension deficits remain stubbornly high. The high deficits are a result of the increase in the value of pension scheme assets not having kept pace with the rising cost of providing pension benefits caused by persistently low and falling interest rates.”

Mercer said that for the outlook for DB plans to improve, interest rates need to rise faster than market expectations and equity markets and other growth assets would need to do well over a prolonged period. Life expectancy improvements seen in the last 20 years would also need to slow down. If one or more of these elements fail to materialise then pension scheme deficits are likely to worsen, Mercer warned.

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