For the first time, UK pension liabilities outstrip GDP, data from Hyman Robertson shows. While GDP rose to £1.8 trillion in 2015, liabilities increased to staggering level of over £2 trillion. According to the consulting firm, pension companies should act fast and focus on income generating assets, to prevent the cannibalisation of capital, and on bulk annuity deals, to reduce the risks linked to the collapse of the sales of individual annuities.
Pensions, benefits and risk consulting firm Hymans Robertson recently released figures that reveal that “for the first time in living memory” the liabilities of UK private sector Defined Benefit (DB) schemes are bigger than the UK economy.
Hyman Robertson’s research shows while the UK GDP has risen to £1.8 trillion in 2015, the liabilities have also increased, from almost £1.7 trillion last year to more than £2 trillion, far in excess of the UK’s GDP. According to the firm, this is the result of ultra-low interest rates that are pushing up liabilities faster than the modest growth rates of UK GDP and despite the companies paying £44 billion in contributions in the last three years in an attempt to shore up their pension schemes.
The data, however, also reveals that pension scheme asset bases are also at their highest levels at £1.3 trillion, up by 40% from the £900 billion five years ago. This leads, as Calum Cooper, Partner at Hymans Robertson, explains to “two pressing actions for both trustees and corporate sponsors of pension schemes.”
Firms should review their investment strategy with an eye to income requirements. Cooper stresses that as schemes mature, investment time horizons are shortened for assets to deliver the returns needed to pay all pensions promised to scheme members. “They increasingly pay out more in benefits than they receive in contributions. So without this focus, there is a very real risk of a downward spiral: cannibalising your capital,” explains Cooper. To deal with this, DB schemes should shift their focus from growth and protection to income generating assets to help them avoid selling assets depressed prices to pay pensions.
In addition, pension companies should look for opportunities to reduce risk, as George Osborne’s ‘freedom and choice’ in pensions caused sales of individual annuities to collapse. The firm expects transfers out of DB schemes with an annual value of £10 billion. According to Cooper, a buy-in, which is a bulk annuity purchased by trustees, is an excellent and popular first step in trying to reduce risks.
“Fortunately there is a clear opportunity right now for schemes, especially small and medium sized ones, to complete bulk annuity deals at highly competitive prices. This is because the life assurance sector has been hit hard by George Osborne’s ‘freedom and choice’ in pensions, which has caused sales of individual annuities to collapse. Insurers are looking to offset this lost income by entering the corporate pensions market,” explains Cooper. “The conditions are good, but pension schemes will need to move quickly to take advantage of this short window of opportunity.”