Companies need longer to repair their defined benefit (DB) pension deficits so that the UK economy is less harmed, a pension expert said.
Raj Mody, head of pensions at PwC, suggested companies should look at 20-year timelines for achieving funded status because trying to repair DB underfunding in a decade would run the UK economy to “standstill”.
Mody’s advice comes as PwC research shows DB deficits improved by £50 billion (€58.7 billion) in November – but are still £100 billion higher than at the start of the year.
The combined deficit now totals £580 billion, which is almost a third of the UK’s GDP.
Deficits have ballooned because growth in asset values has failed to keep up with the rate at which bond yields have collapsed.
Mody said: “If the average repair period was 20 years instead [of ten], this reduces the annual cash funding strain on sponsoring companies.
“It also allows the passage of more time to see if pension assets can deliver outperformance in their returns relative to the more prudent assumptions otherwise used in working out funding demands in advance.”
David Curtis, head of UK institutional business at Goldman Sachs Asset Management, recently told Funds Europe that for every 0.3% decrease in gilt yields, liabilities increased by 6%. However, if assets increased by 1.5% as gilt yields fell, this only reduced the net rise in liabilities by about 4.5%.
©2016 funds europe
