Pensions Face 30 Year Funding Gap
Pensions schemes face a 30 year funding gap according to the FT today. At deVere Group we having been saying for sometime that many company schemes are just unsustainable.
The FT says Employees face a much greater risk their pensions will not pay out than regulators have made assumptions for, amid growing efforts by the industry to tackle the problem of underfunded schemes.
Companies such as BT and British Airways, which have some of the largest UK pension funds, face the biggest risks because they have mature schemes that must pay out millions of pounds to retired members every year.
Analysis by Towers Watson, a consultancy, shows that managers of defined benefit schemes, which offer a fixed annual pension, are far more exposed to the threat of volatile equity markets than had been calculated.
This is because they need nearly 30 more years before they will be able to fully “de-risk” their schemes – switch out of riskier investments, such as equities, and move into safer assets like index-, or inflation-linked, bonds, which allow fund managers to offer close to guaranteed payments.
Towers Watson says UK schemes have liabilities of £2tn compared with index-linked gilts supply of £0.5tn and that it will take until 2039 before the supply of index-linked gilts matches liabilities.
This is much longer than the estimate of about 10 years by the UK Pensions Regulator. Schemes must match their liabilities – current and future payments – with assets, revenue from equity or bonds, to make sure they can meet all their pension obligations.