Mercer Human Resource Consulting has called on the UK government to implement a coherent policy that balances affordability and security of occupational pensions.
Despite the recent equity market rally, the assets of occupational pension schemes will continue to fall far short of funding the full benefits promised to members, if schemes are wound up, says Mercer.
When equities reached their lowest level in 2003, Mercer estimated the total UK pension deficit on a non-profit annuity buy-out basis to be around Ј320 billion. Now the cost of annuities has increased more than equity markets and the deficit is estimated at some Ј330 billion*.
“Annuity rates have escalated because the life insurance market has become less competitive, and more insurers are now taking account of improved life expectancy,” says Paul Greenwood, Worldwide Partner at Mercer. “Annuity rate increases have cancelled out the recent equity market gains, and there is still a huge gap between the cost of securing benefits and available assets. This needs to be addressed.”
To put the Ј330 billion deficit into perspective, Mercer estimates the total value of UK pension scheme assets to be around Ј570 billion, and the total market value of UK publicly-listed companies to be ?1,300 billion.
Since the government changed the rules last June, solvent employers who wind up their schemes must meet the annuity cost in full. Greenwood comments: “Most employers do not expect to wind up their schemes, but their inability to do so at acceptable cost means they will continue to carry the burden of increased life expectancy and market risks. It is a cost that is merely postponed into the future. Such a burden could act as a real brake on the economy.”
To tackle the problem, Mercer suggests that the Government should consider reducing the value of guaranteed benefits or accept a lower level of benefit security. For instance, the value of members’ guaranteed benefits could be reduced by increasing normal retirement age or ceasing to guarantee pension increases in line with inflation.
“The current level of pension benefits can only be guaranteed at great economic cost,” says Greenwood. “The sooner the Government recognises there’s a problem and adopts coherent policies to deal with it, the better.”
In June 2003, the UK government stated that, should a solvent employer wind up a final salary scheme, the debt on the employer should be calculated on the basis of the cost of buying out benefits from a life insurance company.