A claim by UK industry leaders that pensions funding pressure is reducing the money available for corporate growth and job creation has been given support by accountants and actuaries.
The high levels of defined benefit (DB) pension scheme deficits are hampering the ability of UK companies to invest in their businesses, according to a report out today from the Institute of Chartered Accountants in England and Wales (ICAEW) and Mercer, a pension fund consultancy.
In October Neil Carberry, director for employment and skills at the Confederation of British Industry said many firms were being forced to fund their pension schemes with cash that could otherwise be invested in business growth and jobs.
Now the ICAEW and Mercer have found that many finance directors - 57% of those interviewed for the report - say that their DB pension scheme will have a negative impact on the financial performance of their business over the next three years.
Quantitative easing (QE) is having the greatest impact on DB schemes because it inflates pension scheme liabilities, making corporate de-risking costs prohibitively expensive.
Al Tayyebi, senior partner at Mercer, says there is a paradox because “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”.
The method of calculating pension scheme liabilities is typically linked to long-term interest rates so that as long-term gilt yields reduce, the calculation of liabilities increases. Therefore scheme liabilities and deficits are perceived to have been inflated by the effect that QE has had on reducing gilt yields.
Despite these challenges, Tayyebi says, there is still a strong recognition of the need to mitigate or reduce pension risk. Almost 80% of respondents either already have or expect to have a “glide-path” or journey plan of de-risking triggers in place over the next three years.
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