Research from JLT Employee Benefits (“JLT”) found that shortfalls in UK private sector defined benefit (DB) pension schemes have doubled since 2006, despite employers making contributions worth £160 billion. This is primarily the consequence of Increasing life expectancies and low expectations of future investment returns.
JLT estimates that DB scheme assets have grown from £0.65 trillion in 2006 to £1.3 trillion in 2015 whilst liabilities* have risen from £1.1 trillion to £2.1 trillion. This means that, collectively, deficits have doubled from £0.4 trillion to £0.8 trillion. On a per person basis, this is the equivalent of £73,000 per DB scheme policy holder (including all active, deferred and retired members).
A £3.6bn funding gap to fill
The total actual cash flows that schemes have to pay out to members in the future is estimated to be £3.6 trillion. With current assets worth £1.3 trillion, there is a gap of £2.3 trillion - 1.2 times UK GDP (£1.9 trillion in 2014) - that has to be closed by a combination of cash contributions from the sponsoring employer, future investment returns and a reduction in liabilities through de-risking exercises.
According to JLT, if low interest rates became the ‘new normal', then even with projected investment returns companies would need to pay £220 billion in contributions over the next decade just to get them back to the deficits levels of 2006.
JLT explains that improvements in life expectancy were partly responsible for the increase pension scheme.
Longevity at age 65 rose by approximately 2 years between 2006 and 2015, adding £135 billion to pension scheme liabilities.
Murray Wright, actuary and consultant at JLT Employee Benefits, comments:
“Our analysis highlights that DB pension schemes across the UK should take a serious look at how they plan to close deficits. Pension schemes cannot continue to follow the same strategies that have been used for the last 10 years. There is a £2.3 trillion cashflow shortfall that needs to be met by a combination of contributions from sponsors and future investment returns. They also need to consider how the £2.3 trillion target itself can be reduced through liability management exercises. Trustees and employers should ensure they are using all of the levers available to them to stop pension shortfalls from spiraling out of control.”
* Liabilities are measured on buyout assumptions.
The number of pension schemes fell from 7,751 at 31 March 2006 to 5,945 at 31 March 2015. To allow for a like for like comparison JLT has adjusted historic figures to allow for schemes that have wound-up, merged, entered PPF assessment or transferred into the PPF.
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About JLT Employee Benefits
JLT Employee Benefits is one of the UK's leading employee benefit providers offering a wide range of benefit and pension services, including administration, actuarial and pension consultancy, investment, Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs) administration, flexible benefits, healthcare, benefit communication and financial education.
JLT Employee Benefits employs over 2,200 professionals throughout the UK and in 2013 had revenues of £172m in UK & Ireland.
Pensions and employee benefits companies within the JLT Employee Benefits group of companies include: JLT Benefit Solutions Ltd, Profund Solutions Limited, JLT Wealth Management Limited, JLT Investment Management Limited and Independent Trustee Services Limited. JLT Employee Benefits is part of Jardine Lloyd Thompson Group plc.
About Jardine Lloyd Thompson Group plc
Jardine Lloyd Thompson is one of the world's largest providers of insurance and employee benefits related advice, brokerage and associated services. JLT's client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.
JLT is quoted on the London Stock Exchange and owns offices in 39 territories with some 9,000 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.