DB pension deficits hamper investment

High levels of defined benefit (DB) pension scheme deficits are hampering organisations in investing in their businesses, according to research by the Institute of Chartered Accountants in England and Wales (ICAEW) and Mercer.

The Living with defined benefit pension risk report, which surveyed finance directors and other senior leaders on DB pension risk, found that 57% said their DB pension scheme will have a negative impact on the financial performance of their business over the next three years.

Nearly 40% of respondents stated that their DB pension risk is the most, or one of the most, important risk management priorities for their organisation. The report found that firms are taking steps to managing risk:

• 93% of organisations questioned have closed their DB schemes to new members.
• 51% have closed DB pension schemes to future accrual.
• 34% of respondents plan to invest in assets that more closely match liabilities.
• 22% plan to offer enhanced transfer values to existing DB members, while 20% plan to employ alternative funding or contingent assets.

Ali Tayyebi, senior partner at Mercer, said: “While the negative impact of DB pension scheme deficits is clear, companies face a quandary. The current environment which emphasises the need for a clear risk management strategy, is also the one in which it is most difficult to implement de-risking strategies. Companies are concerned about being locked into low interest rates, and the scope to increase cash contributions to their pension schemes in the current environment is limited.”

Robin Fieth, executive director at ICAEW, added: “DB pension schemes are under unprecedented pressure, the result of increasing longevity, difficult market conditions and a tough regulatory environment.

“Although recent years have seen many schemes close to new members and future accrual, DB is still an important part of the UK pension landscape with around £1 trillion still invested in DB schemes.”