Defined benefits suffering from lack of funds

According to many financial analysts, pension funds or defined benefits (DBs) are suffering from lack of funds, and the deficit must be covered, but doing so is likely to cause some major pain for a lot of companies.

PricewaterhouseCoopers puts together a Pension Support Index for tracking the overall support level for defined benefit schemes. As of last report the index shows only 74 on a scoring scale to 100, and the experts believe there will be no improvement without some sort of action from the companies. In many cases that would mean diverting more of their cash flow to the fund, or making payments for a longer period.

Ideally these DB schemes are supported by returns on investments, but that’s not working too well at this point. PwC’s analysts say that the problems are due in large part to the fall in equities and bond yields; most pension scheme managers prefer to invest in equities, and bonds are basically the matching assets for pension funds.

PwC also points out that the beneficiaries of DB plans are living longer; that should be good news but in this case longevity means more liabilities for the fund, and contributes to the current deficit. An advisory partner at PwC, Jonathan Land, noted that at present the overall picture of the UK’s economic world is low interest rates and low return on investments, plus a relatively high inflation rate.

Another pensions expert from PwC, Jeremy May, suggested that pension schemes should be thinking about how to change their investment strategy. He said perhaps that would mean less reliance on government bonds and more on businesses with strong and diverse portfolios, but chiefly it means they will need to get creative in finding ways to make up the DB deficits.