UK Corporate Pensions Want More Funding, Not More LDI

Liabilities are rising for defined benefit schemes, and most companies offering them blame Quantitative Easing, according to a survey by law firm Squire Sanders. 

(October 18, 2012) – Corporations with defined benefit pension plans in the United Kingdom are not a happy lot, according to a just-released survey and study by law firm Squire Sanders. 

One major reason—and it’s no surprise—is Quantitative Easing. Of the companies surveyed, just 4% felt the Bank of England’s loose monetary policy had a positive impact on their plans’ funding position. Another 5% said they had noticed no impact, while an overwhelming 76% felt the program had negatively affected their plans’ ability to fund liabilities. 

The survey was conducted online between August and October 2012, and Squires Sanders followed up on the results through in-depth interviews with sponsoring companies, trustees, actuaries, and consultants in the UK pension space. 

The law firm found three “common and familiar themes” in these discussions: 

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1. Increasing longevity is undermining the affordability of the defined benefit (DB) model, as well as the adequacy of defined contribution (DC) savings. 

2. Age discrimination legislation is leading to increased unemployment among young people and uncertainty about retirement planning. 

3. Sustained low interest rates and likewise low gilt yields are exacerbating pension liabilities—conditions attributed by many to the government’s Quantitative Easing program. 

To make up for the funding shortfalls, companies offering DB pensions said, foremost, that their schemes need more money and longer horizons. Out of all the respondents, 25% cited additional funding as their likely solution to increased liabilities, while 24% planned to extend their scheme’s recovery plan. Just 4% intend to implement new liability driven investing mandates as a response. 

“In terms of DB, there are two key issues,” one consultant, Kevin LeGrand, told Squire Sanders during its study. “Firstly, liabilities are increasing because of increased longevity and how those liabilities are valued and put onto the company’s balance sheet. Secondly, the very poor returns these days on assets. These two are working together to create ‘the perfect storm.’”

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