Defined Benefit  

Majority of DB schemes pay out more than they receive

Majority of DB schemes pay out more than they receive

Three quarters of defined benefit schemes in the UK are paying out more in benefit payments than they receive in contributions, according to research.

According to the 2019 Mid-Market Pensions Review published today (June 18) by consultancy firm Buck the latest figure represents an increase of 5 per cent on the previous year, with the average scheme having net annual outgoings of £3m.

Buck stated the outgoings reflected the increasing maturity of schemes and an up-tick in pensions transfer activity. The consultancy had analysed data from almost 1,900 final salary schemes in 2018.

The research also showed that average annual company contributions decreased from £5m in 2017 to £4.2m in 2018, reflecting actions taken by companies to manage pension costs.

Buck’s survey revealed a one-year reduction in assumed life-expectancy at age 50, resulting in scheme funding positions improving over the year, with an average accounting deficit of 7 per cent of assets – half of what it was two years ago. 

It noted that the life expectancy changes appeared to be part of an established trend and could be reflecting changes in behaviour and in medical advances.

The consultancy firm's research also looked at the impact of the High Court ruling on contracting out benefits in October, which determined that Lloyds bank scheme trustees must equalise benefits between women and men who have guaranteed minimum pensions.

The ruling was considered a solution for a pension problem spanning almost three decades, and schemes are now having to decide how to equalise the contracted out benefits of their members.

Despite estimating that the decision will impact up to 5m people across the UK, Buck stated there was likely to be only a modest effect on the liabilities of pension schemes.

Whilst in extreme cases pension scheme liability values may increase by 5 per cent or more, for a typical scheme the impact was more likely to be around 0.8 per cent, it stated.

According to Vishal Makkar, head of retirement consulting at Buck, the past year had been incredibly busy for the pensions industry.

He said: "We’ve not only seen the issue of GMP equalisation coming to the forefront following the High Court ruling late last year, but with the government consulting on pension consolidation and more recently giving the go ahead to collective defined contribution schemes, we are entering an exciting and potentially transformative time for the pensions sector."

However, despite all this uncertainty, the research showed "improved financial positions for schemes over the past 12 months, with an increasing number of companies taking a more proactive approach to their long-term pensions strategy and broadening their investment allocation," Mr Makkar noted.

He added: "As pension schemes face an uncertain future and the prospect of undertaking a large and complex GMP equalisation project, it’s vital for schemes to conduct a full strategy review of their pension arrangements to ensure they not only manage their costs and risk, but also provide better outcomes and financial security for pension scheme members."