The problematic legacy of defined benefit (DB) pension schemes may haunt the industry for as long as 50 years, much longer than predicted, warns the Pensions Management Institute.
The institute says industry predictions about the DB legacy, especially that buy-outs will be completed within 25 to 30 years, are “wildly over-optimistic”.
“It is becoming increasingly clear that the buy-out market will struggle to provide the capacity to cope with current demand for these exercises, let alone keep up with any growth in the volume of requests,” says Tim Middleton, technical consultant at the institute.
“There is a perception that DB is dead in the water; we couldn’t be further from the truth.”
Middleton says even people who have not even been born yet will spend their careers working on DB issues. The pensions industry has begun to address questions around defined contribution (DC) pensions, without adequately addressing the legacy of DB, he adds.
A key problem with DB pension schemes is funding gaps, even though these appear to have narrowed in recent weeks.
Mercer’s Pensions Risk Survey from June, the last month for which data is available, shows that the accounting deficit of defined benefit pension schemes of UK companies fell in May.
The estimated aggregate deficit for DB schemes of the FTSE 350 companies amounted to £98 billion (€114 billion), a funding ratio of 85%, in May.
In comparison, the deficit was £108 billion, a funding ratio of 84%, a month earlier.
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