All FTSE 350 company pension funds are likely to be closed to future accrual by 2027, warns consultant Hymans Robertson.
The firm's latest FTSE 350 Pensions Analysis said 55% of the firms already have frozen their funds, but the remainder are likely to do so in the next decade as companies move to reduce the cost of defined benefit provision.
A report of the analysis said the cost of DB provision is set to rise for sponsoring employers, with pressure to increase contributions from the Pensions Regulator following a number of high-profile cases in the U.K. Hymans said future pension promises already cost employers 40% to 50% of employee pay.
"Following the resolution of the BHS and Tata Steel pension cases (the Pensions Regulator) is now taking a tougher line of DB funding," said Jon Hatchett, head of corporate consulting at Hymans Robertson, in a statement accompanying the report. "The upshot is companies will be under greater pressure from trustees, with the backing of the Regulator, to pay more cash toward deficits. We've seen a pendulum swing away from the recognition that a strong employer is better able to support its pension scheme, to an expectation of annual deficit contributions increasing when schemes are behind plan."
Mr. Hatchett said the only companies that will not be required to contribute more cash to their funds are those that have hedged most of their inflation or yield risk, or those where affordability is "genuinely stretched."
The report also said there is too much investment risk in the system. Many pension funds still investing "too much in volatile equity-heavy portfolios leaving too much to chance. Equities are at half the level expected back in 2000. The interest rate bets taken by schemes have increased liabilities by well over 50% since then and longevity risk has added another 15%. That's despite companies committing hundreds of billions of pounds toward pension schemes over the same period. Yet accounting deficits now stand at £115 billion ($148.6 billion) for the FTSE 350 at 31 August 2017, and the buyout shortfall for these schemes is around four times larger again. The big bets taken so far this millennium haven't paid off. And pouring more cash into schemes hasn't worked. So why do we think it will now?" added Mr. Hatchett in the statement.
The report is available for download on the Hymans Robertson website.